Jitters Over Fed's Next Move Hit US Stocks

Stocks closed lower and bond yields rose on Wall Street on Wednesday after details from last month's meeting of Federal Reserve policymakers showed the central bank intends to be aggressive in its efforts to fight inflation.

The S&P 500 fell 1 percent, adding to its losses from a day earlier. The Dow Jones Industrial Average dropped 0.4 percent and the Nasdaq slid 2.2 percent.

The minutes from the meeting three weeks ago reveal that Fed policymakers agreed to begin cutting the central bank's stockpile of Treasurys and mortgage-backed securities by about US$95 billion a month, starting in May. That’s more than some investors expected and nearly double the pace the last time the Fed shrank its balance sheet.

At the meeting, the Fed raised its benchmark short-term rate by a quarter percentage point, the first increase in three years. The minutes showed many Fed officials wanted to hike rates by an even bigger margin last month, and they still saw “one or more” such supersized increases potentially coming at future meetings.

“Essentially, the Fed has concluded that a good offence is the best defence,” said Sam Stovall, chief investment strategist at CFRA. “We’re likely to experience not only higher short-term interest rates as a result of the Fed’s actions, but also higher long-term rates, which should pressure potential (stock) gains."

Higher rates tend to reduce the price-to-earnings ratio of stocks, a key valuation barometer. Such a scenario can particularly hurt stocks that are seen as the priciest, which includes big technology companies. That explains why tech stocks were the biggest drag on the benchmark S&P 500 on Wednesday. Apple fell 1.8 percent and Microsoft shed 3.7 percent.

Communications companies, retailers and others that rely on direct consumer spending also weighed heavily on the index. Amazon fell 3.2 percent and Facebook parent Meta fell 3.7 percent.

The S&P 500 ended down 1.0 percent at 4,481. The Dow slid 0.4 percent to 34,496, and the Nasdaq lost 2.2 percent to 13,888.

Investors are keenly focused on Fed policy as the central bank moves to reverse low interest rates and the extraordinary support it began providing for the economy two years ago when the pandemic knocked the economy into a recession.

The Fed's proposed timetable for allowing billions in bonds and mortgage-backed securities to roll off its balance sheet was hinted at on Tuesday in remarks by Fed Governor Lael Brainard, who said the process could start as soon as May and proceed at a rapid pace.

The rapid reduction in the Fed's balance sheet would help push up longer-term rates, but also contribute to higher borrowing costs for consumers and businesses.

“The reality is we are in uncharted waters here and the Fed has a difficult task in unwinding the tremendous monetary support over the past couple years,” said Charlie Ripley, senior investment strategist at Allianz Investment Management. “Against this backdrop, it is highly conceivable that uncertainty in the path of monetary policy will remain embedded in markets and that is exactly what we have been witnessing with the recent moves in interest rates and risk assets.”

The yield on the 10-year Treasury rose to 2.61 percent after the release of the minutes. It had been at 2.59 percent earlier in the day, up from 2.54 percent late on Tuesday. The yield, which is used to set interest rates on mortgages and many other kinds of loans, is the highest it's been in three years. (AP)