The major stock indices are all down around 1% in early trading as investors digest the results of yesterday’s Federal Open Market Committee (FOMC) announcement. The Fed’s projections indicate that it may raise its benchmark interest rate one more time this year. Meanwhile, Treasury yields are climbing sharply. Equity investors fear that rising rates will badly hurt firms and consumers financially while decreasing the attractiveness of equities, pulling stocks down.
The Results of the FOMC Meeting
The Fed left its benchmark interest rate unchanged at 5.25%-5.5%. But in projections released by the Fed, 12 out of 19 FOMC members predicted that the central bank would increase its key rate by 0.25 of a percentage point this year. Moreover, on average, the members now predict that the benchmark rate will be 5.1% in December 2024 versus the previous mean projection of 4.6%. That’s because the committee is forecasting fewer rate cuts in 2024 than previously.
Fed Chairman Jerome Powell stated:
“Given how far we’ve come and how quickly we’ve come, we’re actually in a position to be able to proceed carefully as we assess the incoming data, and the evolving outlooks and risks, and make [interest rate] decisions meeting by meeting,”
Despite Powell’s apparent openness to not raising rates further and the mixed message sent by the FOMC members’ 2023 rate projections, the main takeaway of many on the Street is that the Fed will keep rates “higher for longer.”
Consequently, Treasury bond yields are climbing, with the 10-year Treasury bond’s yield jumping 3% to a new multi-year high of nearly 4.49%.
Why Do High Rates Pull Stocks Down?
Higher interest rates greatly increase the borrowing costs of companies and consumers, weighing on firms’ profits and the overall economy. Additionally, many on the Street view companies’ future profits as less valuable to the owners of stocks when interest rates are elevated. And finally, higher rates provide greater incentives to investors to take their money out of stocks and put them in fixed-income assets such as bonds and money markets.
Also noteworthy is that the yield on long-term Treasury bonds determines the borrowing costs of many consumers and companies. Therefore these borrowing costs will likely stay higher for longer now too.
On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
