US stocks dip after Federal Reserve raises rates

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US stock indexes dipped after the Federal Reserve took the latest step in its campaign to pull interest rates gradually higher.

The decision to raise the federal funds rate for a third time this year was widely expected, and stocks initially climbed following the announcement.

But the gains faded in the last 30 minutes of trading after Fed chairman Jerome Powell finished speaking at a news conference. The sharpest losses came from financial stocks, hurt by a drop in Treasury yields, which can crimp lending profits for banks.

The S&P 500 fell 9.59 points, or 0.3%, to 2,905.97 after being up as much as 0.5% earlier in the day. The Dow Jones industrial average fell 106.93, or 0.4%, to 26,385.28, and the Nasdaq composite lost 17.11, or 0.2%, to 7,990.37.

Mr Powell said that the US economy is in a “particularly bright moment”, which would point to continued increases in rates. But he also said that inflation does not seem likely to spike, which would allow the Fed to continue on its gradual path to raise rates off the record lows they set following the 2008 financial crisis.

Investors spent the most energy on Wednesday analysing a phrase that the Fed dropped from its written statement following its rate decision, one that has been included for years, about how the central bank is being “accommodative” and keeping rates low. Did that mean the Fed would shade toward being less aggressive or more?

But Mr Powell said in the press conference that losing the phrase was not a signal of any change in policy expectations.

Investors closely follow every clue about interest rates, which affect the flow of money and the broad economy, because high rates in the past have been the death knell for economic expansions and bull runs for stocks. But analysts say markets can continue to climb as long as this rise in rates is gradual.

“We have more room to run in this economic cycle,” said Jon Adams, senior investment strategist for BMO Global Asset Management.

The Fed indicated that it expects to raise rates one more time this year, three times in 2019 and once in 2020.

Treasury yields dipped on Wednesday, a step back from their steady rise this year.

The yield on the 10-year Treasury note fell to 3.05% from 3.10% late on Tuesday. It had been close to its highest level since 2011. The two-year Treasury yield, which more closely tracks movements by the Fed, dipped to 2.82% from 2.83%.

Brian Nick, chief investment strategist at Nuveen, said that it was puzzling that both stocks and bond yields fell following the Fed’s move. Usually, when investors think the Fed is going to become more aggressive about raising interest rates, stocks fall but bond yields rise.

Nick said the reaction may be a result of the new 2021 forecasts the Fed gave for the unemployment rate and GDP growth.

Among stocks in the S&P 500, the biggest drop came from Cintas, which provides workers’ uniforms, bathroom supplies and other products to companies. The company reported better earnings for the latest quarter than analysts expected, but growth in rentals fell short of some forecasts. Cintas lost 11.80 US dollars, or 5.5%, to 201.16 dollars.

On the winning side was SurveyMonkey’s parent company, SVMK, which surged in its first day of trading. After pricing its initial public offering of stock at 12 dollars per share, SVMK jumped as high as 20.00 dollars during the morning. It closed at 17.24 dollars, up 43.7%.

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