Brace for higher rates for longer
The Federal Reserve on Wednesday lifted interest rates as expected, but a unified stance among policymakers against inflation has investors settling in for a “higher for longer” environment — even as they remain constructive on equities. The Fed raised interest rates for the first time since 2023, increasing the fed funds rate by a quarter percentage point to the target range of 3.75% to 4.00%. The central bank also signaled one more hike will come this year. But the 12-0 decision to raise rates on Wednesday signaled to investors that the Fed is now in complete alignment in tackling inflation, a marked departure from its split vote in July when policymakers were divided on how to proceed. “When you have all of the Fed governors lining up behind a hike, even the ones who have historically been a little bit more dovish than others, what that tells me is that they are aligned that inflation is the most important thing to get under control — and likely they’re not done,” said Anshul Sharma, chief investment officer of Savvy Wealth. “The advice that we are giving to our advisers is that we are likely going to be in a ‘higher for longer'” environment, Sharma added. The market continues to price in two more rate hikes for the remainder of the year, with fed funds futures pricing in roughly 40% odds that the key interest rate ends December in the range of 4.25% to 4.50%, according to the CME FedWatch Tool. Stocks dropped following the Fed presser. The Dow Jones Industrial Average closed lower by more than 600 points, or 1.2%, while the S & P 500 slid 0.5%. The Nasdaq Composite ended the session a tad lower. Bond yields were generally higher across the board. The U.S. 2-year Treasury yield spiked more than 7 basis points to 4.736%. The 10-year Treasury yield was again above 5%. And, the 30-year Treasury yield was flat at 5.359%. One basis point equals 0.01%, and yields and prices move in opposite directions. Bonds leading Expectations of a rate hike at the September meeting had been growing on Wall Street in recent weeks, after Fed Chairman Kevin Warsh issued a tough speech against inflation last month at Jackson Hole, Wyoming. The speech was followed by a succession of discouraging inflation reports, oil prices climbing back above $100 a barrel, and the U.S. 10-year Treasury yield topping 5% — a series of events that convinced investors the Fed was backed into a corner. Peter Boockvar, chief investment officer at OnePoint BFG Wealth Partners, said that bonds have been in a bear market for some time and will continue to call the shots going forward. “The bond market adjusted interest rates first and all the Fed did was follow,” Boockvar said. “So while what the Fed does is certainly important — I don’t want to downplay it — I think the bond market has essentially taken over setting interest rates.” Market outlook That could suggest a more challenging environment for stocks, but investors remain constructive on equities overall given the underlying strength of the economy. The market is “misreading” the Fed’s rate hike, said Carol Schleif, BMO chief market strategist told CNBC. “The fact that it was unanimous made a point that this is an economy that is very strong,” and the fundamentals are “very much intact” she added, citing consumer spending and employment. Larry Adam, chief investment officer at Raymond James, struck a similar tone noting the resilience of company fundamentals. “I don’t think these interest rates do anything to the equity market,” Adam said citing “strong” company profits, and corporate balance sheets “remaining pretty healthy.” The apparent interest rate-hiking cycle is particularly “less of a concern” for hyperscalers, according to Brad Gastwirth, global head of research at Circular Technology, a firm helping clients manage compute supply chains. Hyperscaler tech giants including Alphabet, Amazon, Microsoft and Meta have been spending billions on data centers, chips, servers and networking equipment. “I don’t think this is going to derail hyperscale spending, at all, in the near future or even in the medium term,” Gastwirth said. UBS noted “investors should spend less time focusing on the first rate hike and more time monitoring the outlook for economic growth, corporate earnings and inflation,” adding that these are more important for future stock returns. “U.S. equities have historically been resilient after the first Fed hike,” UBS said in a Tuesday note to clients. The firm looked at 16 hiking cycles since 1954 and found the average gain in the S & P 500 on year after the first Fed hike was 10.8%. Analysts noted this doesn’t eliminate risk but it also doesn’t mean that investors should reduce exposure to stocks. — CNBC’s Jeff Cox contributed to this report.
