A hawkish Federal Reserve statement sends stocks lower
The Federal Reserve held its policy rate at a range of 4.25% to 4.5%, as was universally expected, but some changes to the statement suggest that the central bank expects to maintain this holding pattern:
The unemployment rate “has stabilized at a low level,” Fed officials said, removing all references to deterioration in the labor market that had been present in December.
No longer does the central bank say that inflation “has made progress” toward its 2% objective; it just “remains somewhat elevated.”
So both parts of the Fed’s dual mandate have seemingly evolved in a way that makes the central bank less likely to reduce rates further, contingent on the status quo enduring, of course.
Yields jumped, with the rate on the 10-year Treasury up about 5 basis points. Stocks extended losses, with small caps posting the biggest knee-jerk retreat after 2 p.m. ET.
“The Fed is remarkably complacent,” said Neil Dutta, head of US economics at Renaissance Macro Research, who believes that core inflation will ease in the months ahead while slowing wage growth and a weak housing market will weigh on growth. “Markets did what you would expect. Stocks fell and yields rose.”
In December, as the central bank became more concerned about upside risks to inflation, potential measures that might be taken by the incoming Trump administration loomed large. That uncertainty is still ever-present. Back then, stocks that might be most impacted by trade barriers got crushed.
