Canada’s main stock index ended down almost one per cent and U.S. stock indexes closed even lower following whipsaw trading after the U.S. Federal Reserve raised its key interest rate by three-quarters of a percentage point and signalled more sharp hikes to come.
The rate hike was the third in a row of the same magnitude, pushing its benchmark short-term rate to a range of between three and 3.25 per cent for the highest level since early 2008.
Officials also forecast they would further raise their benchmark rate to roughly 4.4 per cent by year’s end, a full point higher than they had envisioned as recently as June.
Wednesday’s rate hike was in line with expectations, which allowed markets to climb soon after the announcement before falling sharply as Federal Reserve Chair Jerome Powell warned at a news conference of the difficult road ahead.
“If we want to light the way to another period of a very strong labor market, we have got to get inflation behind us,” Powell said. “I wish there was a painless way to do that. There isn’t.”
By the close, the S&P/TSX composite index was down 184.15 points, or 0.95 per cent, at 19,184.54.
In New York, the Dow Jones industrial average was down 522.45 points, or 1.7 per cent, at 30,183.78. The S&P 500 index was down 66 points, or 1.7 per cent, at 3,789.93, while the Nasdaq composite was down 204.86 points, or 1.8 per cent, at 11,220.19.
The reaction could have been worse had the Fed raised rates even more, as some had expected, said Ryan Crowther, portfolio manager at Franklin Templeton Canada.
“If it had come in at 100, or especially higher than that there would have been more likely a negative reaction because it just would have implied that they think that there’s, you know, even more urgency to effecting the policy.”
The rate decision comes as economies globally, including China, Europe, and in the U.S., are showing signs of weakening, which likely contributed to the somewhat lower rate hike, said Crowther, despite inflation surprising to the upside at 8.3 per cent last week.
The potential of higher rates in the U.S. and falling commodity prices have been putting pressure on the loonie, which traded for 74.64 cents US compared with 74.93 cents US on Tuesday.
The Fed’s announcement also came on the same day that Russian President Vladimir Putin issued a partial mobilization of reservists and warned that he isn’t bluffing about using everything at his disposal to protect Russia.
Markets didn’t seem to have reacted much to the apparent escalation of the war in Ukraine, said Crowther, but it does mean continued disruptions going forward.
“The impact of the war continues to play out in terms of how it’s impacted certain commodities and brought a lot more volatility into various commodities, including natural gas and fertilizers.”
The October natural gas contract was up six cents at US$7.78 per mmBTU, while the November crude contract was down US$1.00 at US$82.94 per barrel.
The December gold contract was up US$4.60 at US$1,675.70 an ounce and the December copper contract was down four cents at US$3.47 a pound.