Stocks struggle after the Fed eases up on rate hikes

The Federal Reserve did exactly what the market was expecting. It raised interest rates by a half-point to a range of 4.25% to 4.5%. Stocks were solidly higher all day before the Fed announcement. But investors then sold the news.

Traders may be disappointed by the fact that the Fed is also sounding more negative about the economy. The central bank's new economic forecasts call for slower growth in gross domestic product (GDP) next year...just 0.5%. The Fed also lifted its forecasts for both the unemployment rate and inflation. Can you say stagflation?

Making matters worse? The Fed clearly isn't done raising rates yet. The so-called dot plots show that central bankers have a median forecast of 5.1% for its fed funds rate at the end of 2023.

The Dow fell nearly 100 points, or 0.3%, after the Fed announcement.

The S&P 500 slipped 0.4%.

The Nasdaq Composite was down 0.6%.

The Fed expects America's economy to cool off even more than it previously thought next year as it plans to continue its rate hike campaign for the long haul.

After raising rates to the highest level in 15 years, the Fed said Wednesday it forecast US gross domestic product, the broadest measure of America's economy, to grow just half a percentage point in 2023. In its previous forecast in September, Fed economists thought the economy would expand by 1.2%.

Joblessness will grow next year too, Fed officials forecast, with the unemployment rate rising to 4.6% by the end of 2023, up from the current rate of 3.7%. In September, the Fed had predicted the unemployment rate next year would grow to just 4.4%.

The prolonged period of rate hikes will help to cool inflation -- just not as quickly as the Fed had previously thought. The central bank now expects prices to rise 5.6% this year, up from 5.4% in its previous forecast. And prices will grow 3.1% next year, higher than its previous forecast of 2.8%.

The Federal Reserve approved a half-point interest rate hike on Wednesday, a smaller increase than in recent months and an acknowledgment that inflation is finally easing.

The increase marks a shift for the central bank after an unprecedented year that includes seven-straight rate hikes as part of an aggressive campaign to try and bring down the highest inflation since the early 1980s.

While lower than the four consecutive three-quarter-point hikes approved at the Fed's previous meetings, Wednesday's rate hike is still twice the size of the central bank's customary quarter-point increase and will likely deepen the economic pain for millions of American businesses and households by pushing up the cost of borrowing even further.

Wall Street is clearly excited about the likelihood of a smaller rate hike. Stocks were solidly higher Wednesday afternoon with less than an hour to go before the Federal Reserve is expected to raise rates by just a half-point. (Traders are pricing in a nearly 80% chance of a so-called 50 basis point hike.)

The major market indexes were near their highest levels of the day. The hope is that the Fed's economic forecasts and dot plot projections for interest rates continue to suggest that inflation is peaking and that the Fed will slow the pace and size of future rate hikes.

But there are risks. Fed chair Jerome Powell could spook investors if he continues to sound overly worried about inflation. And investors could express concerns if the Fed indicates that the economy may be slowing more dramatically than feared and that the unemployment rate may rise more than expected.

The Dow was up more than 200 points, or 0.6%, in midday trading.

The S&P 500 also gained 0.6%.

The Nasdaq Composite rose 0.5%.

White House officials would be first to admit that the historically high inflation that has been plaguing the US has been stubbornly persistent and frustratingly unrelenting. 

Last year, top officials, including President Joe Biden himself and Treasury Secretary Janet Yellen, had predicted that the high prices would be short-lived – a prediction that was proven wrong and that the administration has had to walk back. 

Even as there have been clear signs in recent weeks that inflation appears to be moderating, White House officials continue to stress that it remains a serious problem – and caution that unforeseen events could always prompt things to take a turn for the worse. It has also confronted criticism, including from Republican members, that the American Rescue Plan and other spending have helped fuel inflation even further.  

Still, the White House is eager to point to actions the administration has taken that they argue have, in the broader picture, contributed to alleviating historically high prices. 

Chief among them is the administration’s work on addressing supply chain issues. The administration created an interagency supply chain task force, including a so called “Port Envoy,” to try to untangle some of the major blockages in the country’s most important supply chain arteries. Officials argue that when consumer goods are able to keep moving, that means higher availability of products and ultimately, lower prices. 

Biden has also pointed to his decision to aggressively release oil from the Strategic Petroleum Reserve as having helped to lower prices at the gas pump. It’s difficult to say just how much the SPR releases ultimately affected prices directly – these releases are not meant to have dramatic, overnight impact – but experts say those actions likely did contribute to countering soaring global energy prices resulting from, in part, the war in Ukraine. 

The White House will also credit some executive actions that Biden has taken – for example, to make hearing aids available for purchase over-the-counter and far less expensive and accessible – for helping relieve pressure in narrower ways for everyday consumers. 

On the legislative front, the eventual implementation of the so-called “Inflation Reduction Act” will offer Americans more breathing room, White House officials say – though experts very much disagree on how much of an effect that massive climate, health care and tax package, will actually have on inflation itself. 

Officials have been watching the central bank and its historic interest rate hikes like everyone else. But they are quick to point out that unlike the previous administration, Biden has emphasized the importance of recognizing the Federal Reserve’s independence – and allowing the central bank to do what it needs to do to try to bring inflation down.

The Securities and Exchange Commission has charged seven Twitter users and a podcaster in an alleged $100 million stock manipulation scheme run through social media, the agency said Wednesday.

According to the SEC, the seven Twitter users also used the messaging app Discord to promote certain stocks to “hundreds of thousands of followers,” and then quietly sold their positions after a run-up in the stocks’ prices.

The alleged scheme dated back to at least January 2020 and involved a nationwide network of participants, including four of the defendants who reside in Texas; two in California; one in New Jersey and one in Florida.

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US stocks barely budged in early trading Wednesday. Wall Street is eagerly awaiting the news from the Federal Reserve at 2 p.m. ET.

The Fed is widely expected to raise interest rates again, but by just a half-point following four straight hikes of three-quarters of a point. The market will also be watching for signs of what's next from the Fed.

The central bank also releases its latest economic projections, including its dot plot of interest rate forecasts. Fed Chair Jerome Powell will also hold a press conference at 2:30 p.m. ET.

The Dow rose about 50 points, or 0.2%.

The S&P 500 inched up 0.1%.

The Nasdaq Composite dipped 0.1%.

At the end of the Federal Reserve’s two-day meeting today, the central bank will release its economic outlook. That forecast, which is updated four times a year, includes a chart that plots out an array of dots, showing where each of the Fed’s 19 leaders expect interest rates to go in the future.

Former Fed chair Ben Bernanke first created the dot plot in 2012, mostly as a way to assure the public that Fed leaders planned to keep interest rates low for the time being. 

Now, the opposite is true: The dots have become a signal that interest rates will remain elevated into the future — spooking investors and Fed watchers alike.

The problem is that it’s difficult to predict what the future actually holds. As economic data changes, so do Fed projections.

Federal Reserve Chair Jerome Powell warned last year that “the dots are not a great forecaster of future rate moves,” and that they should be taken “with a big, big grain of salt.” 

But that doesn’t stop investors from reading into them.

Back in December 2021, the Fed was only expecting rates to finish this year at about 0.9%. Goldman Sachs analysts said this week they expect the median “dot” to rise to a new peak in federal fund rates of 5%-5.25%, up from 4.5%-4.75% in September.

That would mean Fed officials expect to raise rates by half a percent more than they did three months ago, when the plot was last released.

Delta Air Lines raised its guidance for fourth-quarter revenue and said it expects profits to grow even more in 2023 and 2024.

The Atlanta-based airline raised its fourth-quarter guidance to between $1.35 to $1.40 a share, up from its earlier guidance of $1 to $1.25. Analysts surveyed by Refinitiv had a consensus earnings-per-share forecast of $1.15.

The company also raised its fourth-quarter revenue target and said its profit margin should be at the top end of its earlier guidance.

"Demand for air travel remains robust as we exit the year and Delta's momentum is building," said Delta CEO Ed Bastian.

The new guidance would give Delta full-year earnings of between $3.07 to $3.12 per share. It said it expects 2023 earnings of between $5 to $6 per share, and 2024 to top $7.

The more bullish profit guidance comes even as Delta recently reached a tentative labor agreement with its pilots that would grant them a 34% raise, including backpay, over the next three years. The pilots are the only major employee group at Delta to have union representation, unlike most other airlines that are more broadly unionized.

Shares of Delta jumped nearly 5% in premarket trading on the guidance, and it also lifted the shares of other major airlines about 1%. Shares of Delta are still down for the year, as are most US airline stocks.