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Stocks Pare Back Gains After Federal Reserve Hikes Rates By 75 Basis Points

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Key Facts

Stocks were slightly higher on Wednesday after five losing sessions in a row: The Dow Jones Industrial Average rose 0.2%, nearly 100 points, while the S&P 500 gained 0.5% and the tech-heavy Nasdaq Composite 1.2%.

The market gave up most of its gains in the afternoon, however, after the Federal Reserve announced it would raise interest rates by 75 basis points, the biggest increase since 1994.

“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures,” Fed officials said in a statement.

Investors had been betting on a 75-basis-point increase, rather than the previously expected 50-basis-point hike, after a much-hotter-than-expected inflation report last week showed consumer prices jumping 8.6% in May compared to a year ago.

The last time the Federal Reserve raised interest rates by 75 basis points was under the leadership of Alan Greenspan in November 1994, when the central bank orchestrated a soft landing and avoided a recession despite hiking rates seven times in 13 months.

Rates on government bonds moderated somewhat on Wednesday after surging higher earlier in the week, with the 2-year and 10-year Treasury yields recently hitting their highest levels since 2007 and 2011, respectively.

Crucial Quote:

“Don’t be fooled by this Wed. morning rally—the overall attitude is still very gloomy, and most people look at a recession and further equity downside as being inevitable,” says Vital Knowledge founder Adam Crisafulli. “The one area of anxiety concerns bear market rallies and there is a worry that one may happen at some point this week around the Fed (most people think any such rally will be ephemeral but violent).”

What To Watch For:

“While markets now expect a 75-basis-point rate hike by the Fed, the press conference following the release of the statement this afternoon will help analysts assess the Fed’s ability to navigate Chairman Powell’s so-called softish landing as it takes a more aggressive approach in stanching inflation,” says Quincy Krosby, chief equity strategist for LPL Financial.

Tangent:

The price of Bitcoin, meanwhile, fell to around $21,000 as the cryptocurrency market continues to be hard-hit by a massive selloff this week as several firms halted exchanges or announced layoffs in what experts are calling a “crypto winter.”

Key Background:

The benchmark S&P 500 fell deeper into bear market territory on Tuesday, now sitting roughly 22% below its record highs in January. All three major averages are coming off the back of their worst down week since January, falling by roughly 5% or more after last week’s red-hot inflation report led to a spike in recession fears.

Further Reading:

Fed Authorizes Biggest Interest Rate Hike In 28 Years As Experts Worry Its Fight Against Inflation Will Spark Recession (Forbes)

Here’s How Markets Reacted Last Time The Fed Hiked Rates By 75 Basis Points (Forbes)

Stock Market ‘Carnage’ Set To Worsen As Fed Rate Decision Looms—Here’s How Bad It Could Get (Forbes)

Here’s What The Crypto ‘Bloodbath’ Means For The Stock Market (It’s Not Good) (Forbes)

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