U.S. stocks end lower, Nasdaq loses 1.2%, after Fed minutes show most officials see more rate hikes likely

By Isabel Wang and Frances Yue

10-year Treasury yield ends at 15-year high

U.S. stocks finished lower on Wednesday, led by a slump in technology-heavy Nasdaq Composite, after the Federal Reserve's minutes from its July meeting show most senior officials saw "upside inflation risks" which could lead to more interest-rate hikes.

How stocks traded

On Tuesday, the Dow Jones Industrial Average fell 361 points, or 1.02%, to 34,946, the S&P 500 declined 52 points, or 1.16%, to 4,438, and the Nasdaq Composite dropped 157 points, or 1.14%, to 13,631.

What drove markets

Stocks booked back-to-back losses on Wednesday as investors digested the release of the Fed minutes from its July policy meeting at which the central bank raised its federal funds rate by a quarter-percentage-point to a range of 5.25%-5.5%, its highest level in more than 22 years.

The July meeting minutes show a majority of senior officials on the Federal Open Market Committee said "further tightening of monetary policy" may be necessary to bring down inflation as they saw "significant upside risks" to it.

Meanwhile, there was a camp that was concerned about the outlook for the economy. "Some" officials seemed more worried about an economic downturn even as the economy looked resilient, according to the minutes.

"Participants continued to view a period of below-trend growth in real GDP and some softening in labor market conditions as needed to bring aggregate supply and aggregate demand into better balance and reduce inflation pressures sufficiently to return inflation to 2 percent over time," the meeting summary said.

See:Fed minutes show 'most' officials continue to worry about 'significant upside inflation risks'

Paul Ashworth, chief North America economist at Capital Economics, said the minutes suggest that officials were in no rush to follow up the 25bp rate hike at that meeting with another in September. "At this stage, everything is data dependent," he said.

"The upshot is that markets appear correct in not expecting the Fed to follow through on the final 25bp rate hike implied by the median of the rate projections made by officials back in June," Ashworth said in emailed commentary on Wednesday.

Fed funds futures traders priced in an 88.5% chance that the central bank will leave interest rates unchanged at a range of 5.25%-5.5% at its meeting on Sept. 20, according to the CME FedWatch Tool. However, the chance of a 25-basis-point rate hike to a range of 5.5%- 5.75% at the subsequent meeting in early November went modestly higher after the release of the minutes.

See:Fed may hold rate steady in September and hike in November, says BofA. Here's how markets might react

The S&P 500 index fell in eight of the last 11 sessions after 10-year Treasury yields BX:TMUBMUSD10Y rose 3.8 basis points to 4.258%. The yield finished the New York session at its highest level since June 13, 2008 amid concerns about an increased supply of government paper, and as economic data continues to generally surprise to the upside, suggesting the Fed has room to keep interest rates higher for longer to combat inflation.

See: How higher-for-longer U.S. rates are unfolding as investors fret over rising yields

In U.S. economic news on Wednesday, U.S. housing starts rose 3.9% in July after a revised 11.7% drop in June. U.S. building permits climbed 0.1% in July.

Industrial production rose 1% in July, the Federal Reserve reported Wednesday, on the back of strong utility use from the hot summer weather and a rebound in auto production. The increase in factory output in July was above expectations of a 0.5% gain, according to a survey by The Wall Street Journal. Output in June was revised down to a decline of 0.8% from the initial estimate of a 0.5% drop.

See:Retailers report earnings: Target headlines the day with profit beat

Companies in focus

Jamie Chisholm contributed

-Isabel Wang

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08-16-23 1624ET

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