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NEW YORK — U.S. stocks slumped Wednesday after the Federal Reserve said it may not cut interest rates next year by as much as it earlier thought, regardless of how much Wall Street wants it.
The S&P 500 fell 41.75, or 0.9%, to 4,402.20. The Dow Jones Industrial Average lost 76.85, or 0.2%, to 34,440.88, and the Nasdaq composite dropped 209.06, or 1.5%, to 13,469.13.
The Fed held its main interest rate steady at its highest level in more than two decades, as was widely expected from its latest meeting. Officials also indicated they may raise the federal funds rate one more time this year, as the Fed tries to get inflation back down to its target of 2%. Fed Chair Jerome Powell said it’s close to hitting the peak on rates, if not there already.
A monitor displays information Wednesday about the Federal Reserve interest rate on the floor at the New York Stock Exchange in New York.
Perhaps most importantly for the market, Fed officials suggested they may cut rates in 2024 by only half a percentage point from where they’re expected to end this year. That’s less than the full percentage point of cuts they were penciling in as of June. That could be a negative for Wall Street, where investors crave rate cuts because of the boost they typically give to all kinds of investments.
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Stocks initially held relatively steady following the release of the Fed’s forecasts, before sliding later in the afternoon.
“As you move further and further away from the meeting, the message may sink in,” said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute. “We very much expect the markets to be knocked a little bit off their axis by this.”
Treasury yields rose in the bond market after the Fed released its projections. They had already been climbing for months after strong reports on the U.S. economy suggested the Fed may need to keep interest rates higher for longer in order to fully drive down pressures on inflation.
The yield on the 10-year Treasury rose to 4.39% from less than 4.32% shortly before the Fed’s announcement and from 4.37% late Tuesday. It’s back to where it was in 2007.
The two-year Treasury yield, which more closely tracks expectations for Fed action, jumped to 5.18% from 5.04% shortly before the Fed’s announcement.
“Future meetings will be a tug-of-war between markets who want cuts and a Fed that is scared its job isn’t done,” said Brian Jacobsen, chief economist at Annex Wealth Management.
High rates hurt prices for all kinds of investments, and high-growth companies are typically among the hardest hit. Big Tech stocks were the heaviest weights on the S&P 500, and Microsoft, Apple and Nvidia all fell at least 2%.
Consumer retail spending holds steady as recession worries drag on
Consumer retail spending holds steady as recession worries drag on
Spending for in-person and online goods and services has moderated over the past year after seeing outsized growth during the early years of the COVID-19 pandemic.
The decline in sales growth has forced some retailers to roll out discounts. Others warn sales could drop further as consumers feel the squeeze of college debt payments returning this fall and still-rising prices for everything from weekly groceries to back-to-school clothing.
Shopdog analyzed spending data from the Census to illustrate consumers’ reaction to inflated prices and higher borrowing costs in 2023.
Retail sales data can offer broad inferences about the spending habits of consumers in the U.S. economy and can serve as an indicator of economic health. Business leaders and Federal Reserve officials watch the data closely for signs that consumers could be struggling with their finances.
The COVID-19 pandemic and job loss caused the economy to contract rapidly and enter a recession, briefly hurting retail sales. With the help of stimulus checks and enhanced unemployment payments, Americans bounced back—and bought a ton of stuff: sporting goods, electronics, furniture, and new homes. And as COVID-19 vaccines rolled out, consumers shifted to spending on previously delayed travel.
Throughout 2021, a flood of stimulus money and rapidly rising profits contributed to a red-hot economy in which prices were rising faster than at any time since the 1980s. By 2022, Federal Reserve officials began raising interest rates in an attempt to cool down rising prices. So far in 2023, growth in sales has started to slow as consumers muddle through an increasingly expensive world.
Pandemic boom in the rearview as inflation erodes spending power
Census data shows retail sales growth has slowed since federal officials began taking their fight against inflation seriously last summer.
When the Fed raises its interest rates, banks follow. A monetary policy like this aims to slow down an economy flush with cash so prices grow slower. It’s a policy experts argue causes necessary pain for consumers in the short term to avoid perpetual inflation in the long term.
So far, the Fed has seen inflation cool from a modern high of 9% last year, but in late August, officials said they need to see it decrease further before they pause rate hikes.
Online retail spending is up 7.5% over summer 2022
Even as overall spending flattens, Americans’ online shopping habits have reverted to pre-pandemic trends. Consumer spending has steadily shifted from retail to e-commerce since Jeff Bezos had the idea to sell books online in 1994. That steady growth got a big boost in 2020 when online shopping often became the only way to spend money.
After correcting downward as shoppers ventured out of their homes, the portion of retail sales happening online is growing again at pre-pandemic rates despite the overall challenges faced by consumers.
However, signs are emerging from retailers that the typical American may be unable to keep spending on goods and services the same way in the second half of 2023.
Stalled spending growth is cold comfort for nervous small retailers
Retail giant Walmart is raising its profit expectation through the end of the year, reporting gains in e-commerce sales. However, their projections starkly contrast with others in the retail space that are beginning to report gloomy forecasts.
Big sportswear retailers such as Dick’s Sporting Goods, which usually benefit from a surge in sales during back-to-school season, have cut their profit expectations for the rest of the year.
And optimism is low, according to a 2022 industry report by the National Federation of Independent Businesses, which represents the interests of America’s small businesses. Most small businesses believe the country is already in a recession despite no official call by the National Bureau of Economic Research, and they expect lower sales through the end of the year.
Story editing by Ashleigh Graf. Copy editing by Kristen Wegrzyn.
This story originally appeared on Shopdog and was produced and distributed in partnership with Stacker Studio.
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