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Stocks whipsaw as U.S. Fed signals more rate hikes to come

Click to play video: 'US central bank hikes interest rate for 3rd consecutive time, up to 3.25%' US central bank hikes interest rate for 3rd consecutive time, up to 3.25%
WATCH: The U.S. Federal Reserve delivered its third straight 75-basis point interest rate hike to 3.25 per cent on Wednesday, with Federal Reserve Chair Jerome Powell speaking at a press conference after the announcement – Sep 21, 2022

Stocks bounced around and bond yields snapped higher Wednesday after the Federal Reserve made another big interest rate hike and sharply increased its outlook for how high it expects to raise rates in coming months.

Treasury yields pushed further into multiyear highs after the central bank raised its short-term rate by three-quarters of a point. The Fed also said it now expects its benchmark rate to be a full percentage point higher by the end of the year than it had predicted in June.

“We have got to get inflation behind us,” Fed Chair Jerome Powell said during a press conference. “I wish there were a painless way to do that — there isn’t.”

The S&P 500 fell 1.2 per cent after wavering between gains and losses as traders considered the impact of the Fed’s update on interest rates, which have widespread effects on markets and the economy.

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The Dow Jones Industrial Average also flipped between gains and losses. It was down 377 points, or 1.2 per cent, at 30,335 as of 3:43 p.m., while the Nasdaq was down 1.2 per cent.

Read more: The loonie is at a nearly 2-year low. What does that mean for inflation?

The yield on the two-year Treasury, which tends to follow expectations for Fed action, rose to 4.01 per cent from 3.97 per cent late Tuesday. It is trading at its highest level since 2007. The yield on the 10-year Treasury, which influences mortgage rates, fell to 3.51 per cent from 3.56 per cent from late Tuesday.

The Fed is raising rates to fight the worst inflation in 40 years. The worry is that the Fed may cause a recession by slowing the economy too much.

“Ultimately, the policy appears to be appropriate given the economic backdrop, but investors should prepare for rough seas ahead as aggressive Fed policy usually leaves a path of destruction in the wake behind,” said Charlie Ripley, senior investment strategist at Allianz Investment Management.

The broader market has been lurching between gains and losses throughout the week ahead of the latest update on interest rates from the Federal Reserve.

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About 75 per cent of the stocks in the S&P 500 were down, with retailers, banks and technology companies among the heaviest weights on the benchmark index. Amazon dropped 2 per cent, Bank of America shed 2.1 per cent and Mastercard fell 1.9 per cent.

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The Fed has been raising rates aggressively to try and tame high prices on everything from food to clothing.

During his press conference, Powell stressed his resolve to lift rates high enough to slow the economy and drive inflation back toward the central bank’s two per cent goal. Powell said the Fed has just started to get to that level with this most recent increase.

The central bank’s latest rate hike lifted its benchmark rate, which affects many consumer and business loans, to a range of 3 per cent to 3.25 per cent, the highest level in 14 years, and up from zero at the start of the year.

The Fed’s goal is to slow economic growth and cool inflation, but Wall Street is worried that it could hit the brakes too hard on an already slowing economy and cause a recession. Those concerns have been reinforced by reports showing that inflation remains stubbornly high and statements from Fed officials that they will keep raising rates until they are sure inflation is coming under control.

Central banks worldwide are also dealing with inflation. The Bank of Japan began a two-day monetary policy meeting Wednesday, although analysts expect the central bank to stick to its easy monetary policy. Rate decisions from Norway, Switzerland and the Bank of England are next. Sweden surprised economists this week with a full-point hike.

Global tensions remain high as Russia’s invasion of Ukraine continues. Russian-controlled regions of eastern and southern Ukraine have announced plans to start voting this week to become part of Russia. The war has killed thousands of people, driven up food prices worldwide and caused energy costs to soar.

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Gasoline prices, which helped fuel inflation for months, have been generally falling. But, the average price for a gallon of gas went up for the first time in more than three months, rising to $3.681 from $3.674, according to motor club AAA.

Several companies gained ground after giving investors encouraging financial updates. Cheerios maker General Mills rose 5.8 per cent after raising its profit forecast for the year. CoverGirl owner Coty rose 3.7 per cent following a solid revenue growth update and Walmart rose 1.4 per cent after saying it will hire 40,000 U.S. workers for the holidays, a majority of them seasonal workers.

Cruise line operators slipped as Hurricane Fiona continued to batter the Caribbean. Carnival fell 6.3 per cent.

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