Fed Signals Slower Hikes But Higher Top Rate; S&P 500 Dives

The Fed hinted at slower rate hikes, but Chair Jerome Powell said the top rate may go higher than expected, sinking the S&P 500.

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May 14, 2023 • 2 min read

On Wednesday, the Federal Reserve raised its key rate from 3.75% to 4%. The Fed also signaled that future rate increases may slow down. Fed chief Jerome Powell, however, indicated that the top rate could rise to close to 5%. S&P 500 rose after the policy announcement, but then fell hard when Powell spoke, and at the end of the day.

The Fed's statement echoed the line that has been repeated at every Fed meeting since March. The committee anticipates "continuous increases in the target range."

The new statement stated that the Fed's policy committee would take into consideration "the delays with which monetary policies affect economic activity and inflation."

Even a modest change in the language said volumes. There is no doubt that a large part of the Fed policy committee fears the rapid-fire 75-basis point hikes may go too far.

Powell said that the rate of hikes is less important than the amount and length of time the Fed keeps rates at the restrictive level.

Powell stated, "We have a long way to go." It is premature to think about stopping.

He said that he believes the Fed policy rate will be higher than what policymakers had predicted in September.

The September quarterly projections showed that the federal funds rate would rise to 4.6%. This implies a target range between 4.5% and 4.75%.

Powell's belief that the top interest rate will be higher implies, at minimum, a range between 4.75% and 5%.

The Fed Chair also emphasized that the risks are skewed towards inflation becoming entrenched. He said that from a risk management perspective, the main concern is "either not tightening enough or loosening policy too quickly."

He said that the Fed does not want to tighten too much. If it does, then policymakers can use tools to boost growth, just as they did during the Pandemic.

It is more concerning that inflation will continue to rise over the next several years. This would be detrimental for both the job market as well as the households who are most affected by inflation.

S&P 500 jumped lower after the Fed statement. The S&P500 finished 2.5% lower. The Dow Jones Industrial Average fell by 1.55% while the Nasdaq Composite dropped by 3.4%.

The S&P 500 closed Tuesday 19.6% lower than its record high of Jan. 3 but 7.8% higher than its low from Oct. 12. Dow Jones is now 11.3% away from its record high. The Dow Jones climbed 13.7% since its 52-week low closing on September 30. The Nasdaq is up 5.5% since October 14, but still 32.2% off its record high.

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The 10-year Treasury yield dropped 5 basis points after the Fed's statement to 4%. However, it jumped to 4.09% following Powell's hawkish comments.