The Dow dropped more than 300 points, or about 1%, just after 2 p.m. in New York before cutting some losses during Federal Reserve Chair Jerome Powell's press conference . Both the S&P 500 and Nasdaq also declined. Treasury yields surged, and the benchmark 10-year yield broke back above 1.56%.
Traders eyed the results of the Federal Reserve's June monetary policy decision, which yielded no immediate changes to policy but showed an upgraded outlook for a change to benchmark interest rates in the next two years. At least for now, the Fed kept rates on hold and signaled it would continue its quantitative easing with asset purchases taking place at a rate of $120 billion per month.
According to the Fed's new economic projections, seven of 18 officials now see an interest rate hike taking place by the end of 2022, compared to four in March. And 13 officials now see at least one hike by the end of 2023, or nearly double the 7 who expected such a result from March.
“This is not what the market expected. The Fed is now signaling that rates will need to rise sooner and faster, with their forecast suggesting two hikes in 2023," James McCann, Aberdeen Standard Investments deputy chief economist, said in an email Wednesday afternoon. "This change in stance jars a little with the Fed’s recent claims that the recent spike in inflation is temporary. If price volatility is temporary then there’s no obvious reason why they need to raise rates sooner than planned, especially with the labor market having disappointed of late. For some it is certainly going to signal deeper concerns about inflation on the committee."
The new forecasts for the path forward for interest rates coincided with an upgraded outlook for economic growth. The median projection among Federal Open Market Committee members is for real GDP to grow by 7.0% in 2021 before slowing to 2.4% in 2024, with both projections better than the 6.5% and 2.2%, respectively, seen in March. Inflation expectations also rose, however, with the Fed now seeing core personal consumptions expenditures rising by 3.0% this year compared to 2.2% in its previous projection, before slowing to 2.1% by 2023.
The Fed also removed a sentence from its April policy statement noting that the pandemic "is causing tremendous human and economic hardship across the United States and around the world" – a change Neil Dutta, head of U.S. economics at Renaissance Macro Research, highlighted as "hawkish."
The updated projections come at a critical juncture in the U.S. economic recovery, with economic activity accelerating and producing inflationary pressures that some market participants believe may warrant a nearer-term shift to monetary policy than the central bank has currently telegraphed.
On Tuesday, new economic data showed producer prices surged at the fastest year-on-year rate on record, with inflationary pressures reverberating across the supply chain as demand picks up. The data added to a spate of other readings corroborating these rising prices, with both the core consumer price index and core personal consumption expenditures at a near 30-year high in May.
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4:05 p.m. ET: Dow drops 266 points, or 0.8%, after Fed signals possible rate hikes by end of 2023
Here were the main moves in markets as of 4:05 p.m. ET:
1:55 p.m. ET: Stocks slightly lower just before Fed decision
The three major indexes were in the red ahead of the Federal Reserve's June monetary policy decision. The health care and real estate sectors outperformed in the S&P 500, while financials, industrials and materials lagged.
Here's a snapshot of where markets were trading leading up to the decision:
10:13 a.m. ET: Tech stocks outperform, Microsoft rises to highest level since April
Technology stocks were the major outperformers during Wednesday's session, with the move higher coinciding with a drop in Treasury yields ahead of the Federal Reserve's June policy decision.
The health care and information technology sectors outperformed in the S&P 500. Shares of Microsoft (MSFT) and Apple (AAPL) outperformed in the Dow alongside Merck (MRK) and Amgen (AMGN).
Microsoft shares rose to their highest level since April 37 intraday on Wednesday, bringing the tech giant within striking distance of a $2 trillion market capitalization. The company is nearing the launch of its next generation of Windows on June 24. Apple and Amazon (AMZN) shares each touched their highest levels since early May.
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10:00 a.m. ET: Oracle shares sink 6% after strong fiscal 4Q results fail to impress Wall Street
Technology service provider Oracle (ORCL) posted fiscal fourth-quarter results that beat estimates late Tuesday, but the stock sold off as the print and guidance ultimately failed to wow Wall Street.
Adjusted revenue grew 8% to $11.23 billion during the three months ended May 31, beating estimates for $11.04 billion, based on Bloomberg consensus data. This was in turn led by a beat in the company's cloud services and license support unit – its largest by sales – with revenue there growing 66% to $7.39 billion. Adjusted earnings per share of $1.54 were ahead of the $1.31 expected.
Oracle CEO Safra Catz said during the company's conference call that Oracle expects revenue growth to increase by mid-single digits for fiscal 2022, largely driven by Oracle's cloud business. The company also expects to double its cloud capital expenditures spending for the current fiscal year to nearly $4 billion, Catz added.
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9:30 a.m. ET: Stocks open mixed ahead of Fed decision
Here's where markets were trading shortly after the opening bell Wednesday morning:
Housing starts rose 3.6% to a seasonally adjusted annualized rate of 1.572 million in May, the Commerce Department said Wednesday. This followed a 12.1% drop in April, which was revised down from the 9.5% decrease previously reported.
Building permits, meanwhile, fell 3% to a seasonally adjusted annualized rate of 1.681 million. This was a bigger decrease than the 0.2% expected, and followed a drop of 1.3% in April. April's decline was previously reported as a 0.3% increase.
"The latest batch or residential housing construction data won’t be music to Fed officials’ ears as they meet today," Chris Rupkey, chief economist for Fwdbonds, wrote in an email Wednesday morning. "There is not enough construction of single-family homes to alleviate the housing shortage in America and despite real GDP of nearly 10% this quarter this is one economic sector that isn’t growing fast enough. There are 332 million Americans and not nearly enough homes to put them all in which means the housing price bubble will continue to worsen."
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7:24 a.m. ET Wednesday: Stock futures trade mixed
Here's where markets were trading Wednesday morning:
NEW YORK, NEW YORK - MAY 11: People visit the Fearless Girl Statue in front of the New York Stock Exchange in Wall Street on May 11, 2021 in New York City. New York Governor Andrew Cuomo announced pandemic restrictions to be lifted on May 19. (Photo by Noam Galai/Getty Images) ·(Noam Galai via Getty Images)