Stocks drift on Wall Street following smaller Fed rate hike

By STAN CHOE
AP Business Writer

NEW YORK (AP) — Stocks are drifting on Wall Street Wednesday following the Federal Reserve’s latest hike to interest rates, which are meant to get inflation under control.

The S&P 500 was 0.4% lower in afternoon trading. The Dow Jones Industrial Average was down 330 points, or 1%, at 33,755, as of 2:26 p.m. Eastern time, while the Nasdaq composite was virtually unchanged.

As expected, the Fed raised its benchmark interest rate by 0.25 percentage points to its highest level since late 2007. It’s the smallest such increase in the Fed’s blizzard of rate hikes since March.

What’s likely more important for markets than Wednesday’s rate increase is what Fed Chair Jerome Powell says later this afternoon is coming next.

Much of Wall Street is hoping that cooling inflation since the summertime means the Fed may raise rates just one more time this year, before taking a pause and then possibly cutting rates toward the end of the year. Rate cuts can ease pressure on the economy and juice investment prices.

So far, though, the Fed has been adamant that it plans no rate cuts until 2024 at the earliest and wants to hold rates higher for longer to ensure it doesn’t allow inflation to fester and reignite.

At stake is the economy, which many investors see likely heading down one of two paths: either a relatively short and shallow recession or a much deeper and more painful one. Building hopes for the former helped stocks rally through January to a strong start of the year.

But a third path is also possible, said Rich Weiss, senior vice president at American Century Investments: one that happened during the 1970s where inflation reignited after the Federal Reserve let up on interest rates too soon.

“We’re headed into a recession one way or the other, whether the Fed eases up on the brakes or not,” Weiss said. “So you might as well kill inflation while you’re doing it. I think it’s nonsensical to think the Fed is going to magically take their foot off at exactly the right time and slide into a short and shallow downturn and the stock market will come through unscathed.”

Higher interest rates try to snuff out inflation by slowing the economy and dragging on prices for stocks and other investments. The Fed has already pulled its key overnight rate to its highest level since 2007, at a range of 4.50% to 4.75%, up from virtually zero early last year.

One area influencing expectations for the Fed is the job market, which has remained resilient despite all of last year’s rate hikes. While strength there helps workers, a worry is that it could lead to too-high gains in wages that give inflation more fuel.

Reports on Wednesday gave a mixed picture on hiring. Private payrolls rose by 106,000 in January, according to ADP. That’s a slowdown from growth of 253,000 a month earlier, and it was well below the 170,000 that economists expected.

But a separate report from the U.S. government indicated more strength. It said the number of job openings increased to 11 million in December, better than the slowdown to 10.3 million that economists expected. The more comprehensive report on the U.S. job market will arrive on Friday.

Adding to the mixed picture on the economy was a report from the Institute for Supply Management, which said U.S. manufacturing weakened by more than expected last month. It was the third straight month of contraction.

Treasury yields fell after the release of the ADP report, which may have raised expectations for an easier Fed, and then pared their losses following the other reports.

The two-year yield, which tends to track expectations for the Fed, rose to 4.23% from 4.21% late Tuesday. The 10-year yield, which helps set rates for mortgages and other important loans, fell to 3.48% from 3.51% late Tuesday.

A lackluster earnings reporting season also continues on Wall Street, with more mixed profit reports arriving from big U.S. companies.

Electronic Arts tumbled 11.8% after it gave forecasts for upcoming results that fell short of Wall Street’s expectations. Analysts said some gamers may be getting more selective given the softening economy.

WestRock, a paper and packaging company, dropped 15.7% after it reported weaker earnings and revenue for the latest quarter than expected. It also axed its forecasts for this fiscal year, citing uncertainty about the economy.

On the winning side was Advanced Micro Devices, which rose 9.6% even though its profit tumbled 98% in the fourth quarter from a year earlier. Its results were better than analysts expected.

Facebook parent Meta reports after the bell Wednesday, followed by Alphabet, Amazon and Apple on Thursday, as well as Ford and Starbucks.

In overseas markets, European stocks were mixed.

Data on Wednesday showed that Europe’s inflation rate dipped at the start of the year, giving some relief to consumers. But prices remain elevated, prompting a number of protests, and will likely press the European Central Bank into another interest rate hike Thursday.

In Asia, stocks in Shanghai gained 0.9% after surveys showed Chinese factory activity increased in January but still is subdued amid weak global demand and COVID-19 outbreaks that disrupted business.

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AP Business Writers Joe McDonald and Matt Ott contributed.

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