FED raises rates. Wall Street expected it, and flipped out anyway

Yesterday about 1pm, the long-anticipated word came down.

The Federal Reserve on Wednesday raised short-term interest rates by 0.50%, as part of an effort to tamp down the inflationary pressures weighing on Americans..

The central bank suggested that it will further raise borrowing costs throughout this year as it attempts to undo its pandemic-era, easy money policies. The policy-setting Federal Open Market Committee also detailed plans on unwinding its nearly $9 trillion balance sheet.

The decision to raise rates by 0.50% marked the most aggressive increase made in a single meeting since May 2000. Over the last two decades, the Fed has opted to raise interest rates only in increments of 0.25%, with the latest move underscoring the severity that inflation poses at the moment.....

The Fed is now targeting interest rates in a range between 0.75% and 1.00%, with some Fed officials advocating for raising the target closer to 2.5% by the end of the year.

Not a surprise, but the stock market took off anyway, with the Dow Jones Industrial Average jumping more than 900 points.

Why? Because the FED Chair indicated that he and other members of the FOMC weren't going to raise rates more than a 1/2 point now, or in the future.

The central bank announced that it was hiking its benchmark interest rate 50-basis-points, or 0.5 percentage point, and would start reducing its balance sheet in June. That is the biggest rate increase since 2000 for the Fed, but the move was widely expected by investors.

Stocks moved sharply higher when [FED Chair Jerome]Powell said the central bank was not considering an even more aggressive hike in future meetings.

“So a 75-basis-point increase is not something that committee is actively considering,” Powell said. “I think expectations are that we’ll start to see inflation, you know, flattening out.”

So this likely means that the less harsh scenario would influence the market today, give people confidence that we wouldn't fall into recession, and keep the market above where it was before Powell spoke. Riiight?

The Dow Jones Industrial Average lost 1,063 points, or 3.12%, to close at 32,997.97. The tech-heavy Nasdaq Composite fell 4.99% to finish at 12,317.69, its lowest closing level since November 2020. Both of those losses were the worst single-day drops since 2020....

The moves come after a major rally for stocks on Wednesday, when the Dow surged 932 points, or 2.81%, and the S&P 500 gained 2.99% for their biggest gains since 2020. The Nasdaq Composite jumped 3.19%.

Those gains had all been erased before noon in New York on Thursday.

“If you go up 3% and then you give up half a percent the next day, that’s pretty normal stuff. ... But having the kind of day we had yesterday and then seeing it 100% reversed within half a day is just truly extraordinary,” said Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research.

And 1 day after the Wall Streeters seemed to be OK with growth prospects and inflation being headed off, they panicked. Not only did they sell equities, they also sold treasuries, causing rates to spike anyway.

The Treasury market also saw a dramatic reversal of Wednesday’s rally. The 10-year Treasury yield, which moves opposite of price, surged back above 3% on Thursday and hit its highest level since 2018. Rising rates can put pressure on growth-oriented tech stocks, as they make far-off earnings less attractive to investors.

And now we get the April jobs report to give us a look at whether the torrid growth in the labor market is slowing down, and if so, the market will likely panic as well.

What's funny to me is that I don't think they should panic at all, barring some crazy number under +100,000 (that would be a major downshifthat the US has added at least 400,000 jobs in each of the last 4 months). After all, we were at 3.6% unemployment in March, and there's a legitimate question as to how many more jobs we can add at this poinmt. A slowdown in job growth wouldn't be that bad, and give businesses more time to "catch up" to the still-high demand for products in many sectors.

But given that Wall Street clearly has no clue if they or the economy is coming or going at this point, I am not feeling comfortable predicting any reaction on what happens after tomorrow's jobs report comes out at 7:30. And until we see something significantly change in price growth, wage growth, job growth, or demand growth, things are going to be in a volatile, confused state.

That's not a fun place to be in. Especially if you have a real job, lack unlimited funds to play with, and/or don't do cocaine.