U.S. stocks end lower after Fed leaves interest rates unchanged, signals another rise possible

By Frances Yue and Isabel Wang

U.S. stock indexes finished lower Wednesday afternoon after Federal Reserve left its benchmark interest rate decision unchanged, but signaled another rise is possible in November.

How stock indexes traded

The S&P 500 SPX closed down 41.75 points or 0.9%, to 4,402.20The Dow Jones Industrial Average DJIA ended 76.85 points, or 0.2%, lower to 34,440.88The Nasdaq Composite COMP finished down 209.06 points, or 1.5%, to 13469.13

On Tuesday, the Dow Jones Industrial Average fell 107 points, or 0.31%, to 34,518, the S&P 500 declined 10 points, or 0.22%, to 4,444, and the Nasdaq Composite dropped 32 points, or 0.23%, to 13,678.

What drove markets

U.S. stocks fell on Wednesday after the Federal Open Market Committee kept its policy interest rate unchanged, as expected, while indicating a majority of officials continue to expect one more quarter percentage point interest rate hike before the end of the year.

The U.S. central bank also sent a clear message that interest rates are expected to be "higher for longer" by cutting their forecast for rate cuts in 2024 from four to two.

As a result, officials see their benchmark rate rate still slightly above 5% by the end of next year. After today's decision, the Fed's benchmark rate remains in a range of 5.25%-5.5%.

See: Fed skips September rate hike, doesn't rule out November rise

The Fed also predicted the U.S. economy will slow from an estimated 2.1% growth rate in 2023 to 1.5% in 2024 -- and then speed up again. It predicted the rate of inflation would decelerate from an estimated 3.3% at the end of this year to 2.5% in 2024 and 2.2% in 2025, based on the Fed's preferred PCE price gauge.

See also: Fed predicts 'soft landing' for the economy -- low inflation and no recession

The Fed's statement "maintained the tightening bias, with the language that the FOMC will look to determine 'the extent of additional policy firming,' analysts at Capital Economics wrote in a note Wednesday afternoon.

Alexandra Wilson-Elizondo, deputy chief investment officer of multi-asset strategies at Goldman Sachs Asset Management, said she thinks the Fed's statement was more hawkish than expected.

"While a share of past policy tightening is still in the pipeline the Fed can go into wait and see mode, hence the pause. However, the main risk remains tarnishing their largest asset, anti-inflation credibility, which warrants favoring a hawkishness reaction function," Wilson-Elizondo wrote.

"Most likely, the recent rise in energy prices and resilient consumption and activity data drove the higher median dot in 2024," she wrote. "We don't see a singular upcoming bearish catalyst, although strikes, the shutdown, and the resumption of student loan repayments collectively will sting and drive bumpiness in the data between now and their next decision."

Some recent stronger-than-expected U.S. economic data, alongside oil prices (CL00) (CL.1) this week rising to a 10-month high, have raised concerns that inflationary pressures will prove stubborn and the central bank thus may have to keep borrowing costs higher for longer.

Still, "I think that the stock market is getting used to the expectations that rates are gonna be higher for longer," said Travis Anderson, co-founder at TBH Advisors. "It doesn't seem to have changed the risk appetite in the secondary market that much," Anderson said in a call.

"This desire and ability to operate in a little higher-rate environment is out there," said Anderson.

See: Why Fed's response to this key question could spark 5% stock-market pullback or 'solid rally'

Companies in focus

Instacart CART shares closed down 10.7% Wednesday following a Tuesday IPO in which they finished up 12%. General Mills Inc. GIS was mostly flat after the branded consumer foods company reported fiscal first-quarter results that topped expectations and affirmed its full-year outlook, as inflation has moderated, supply chains have stabilize and an "increasingly cautious consumer" has remained resilient. Coty Inc.'s COTY ended 4.5% higher Wednesday after the beauty, cosmetics and fragrance giant raised guidance for fiscal 2024, boosted by strength in its prestige fragrance business. Pinterest Inc. PINS rose 3.1% after executives of the social-media company forecast accelerated revenue growth following a slowdown dating to 2022. Management said they expect a compound annual growth rate over the next three to five years in the mid- to high teens, compared with guidance in the high single digits for the third quarter.

-Frances Yue -Isabel Wang

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09-20-23 1631ET

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