Stocks drift on Wall Street following smaller Fed rate hike

NEW YORK (AP) – Stocks drifted on Wall Street on Wednesday after the Federal Reserve’s latest rate hike aimed at bringing inflation under control.

The S&P 500 was down 0.4% in afternoon trade. The Dow Jones Industrial Average fell 330 points, or 1%, to 33,755 at 2:26 p.m. Eastern time, while the Nasdaq Composite was little changed.

As expected, the Fed raised interest rates by 0.25 percentage points to their highest level since late 2007. This is the smallest such hike in the Fed blizzard since March.

What’s probably more important to markets than Wednesday’s rate hike is what Fed Chair Jerome Powell says next this afternoon.

Much of Wall Street is hoping that the slowdown in inflation since the summer means the Fed will only hike rates once more this year before pausing and then potentially cutting rates later in the year. Interest rate cuts can reduce the pressure on the economy and relieve investment prices.

So far, however, the Fed has insisted it doesn’t plan rate cuts until 2024 at the earliest and wants to keep rates higher longer to ensure inflation doesn’t smolder and flare up again.

At stake is the economy, which many investors believe is likely to take one of two paths: either a relatively short and shallow recession, or a much deeper and more painful one. Build-up hopes for the former helped shares rally into January for a strong start to the year.

But a third way is also possible, said Rich Weiss, senior vice president at American Century Investments: one that happened in the 1970s when inflation flared up again after the Federal Reserve cut interest rates too soon.

“We’re heading into a recession one way or another, whether the Fed eases 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 that at just the right time, the Fed will magically take its foot off the foot and slide into a short and shallow downturn and the stock market will come out unscathed.”

Higher interest rates try to wipe out inflation by slowing the economy and raising the prices of stocks and other investments. The Fed has already hiked its key federal funds rate to its highest level since 2007, in a range of 4.50% to 4.75%, from practically zero early last year.

One area driving expectations for the Fed is the labor market, which has remained resilient despite all the rate hikes over the past year. While strength there is helping workers, there are concerns it could result in excessive wage increases that will fuel inflation further.

Wednesday’s reports gave a mixed picture on recruitment. According to the ADP, private payrolls rose by 106,000 in January. That’s a slowdown from the 253k growth a month earlier, and it was well below the 170k economists were expecting.

But a separate US government report suggested more strength. Job vacancies rose to 11 million in December, better than the slowdown to 10.3 million expected by economists. The broader US jobs report will arrive on Friday.

Adding to the mixed picture of the economy was a report from the Institute for Supply Management that US manufacturing weakened more than expected last month. It was the third consecutive month of contraction.

Treasury yields fell after the release of the ADP report, which may have fueled expectations of a looser Fed, and then pared losses after the other reports.

The two-year yield, which is trending in line with expectations for the Fed, rose to 4.23% from 4.21% late Tuesday. The 10-year yield, which helps set interest rates on mortgages and other major loans, fell to 3.48% from 3.51% late Tuesday.

A lackluster earnings report season also continues on Wall Street, with more mixed earnings reports arriving from large US companies.

Electronic Arts fell 11.8% after issuing forecasts for upcoming earnings that fell short of Wall Street’s expectations. Analysts said some players may become more selective as the economy slows.

WestRock, a paper and packaging company, fell 15.7% after reporting weaker-than-expected earnings and sales for the most recent quarter. It has also trimmed its forecasts for this fiscal year citing uncertainty about the economy.

On the positive side was Advanced Micro Devices, which rose 9.6% even though its fourth-quarter profit fell 98% year over year. The results were better than analysts expected.

Facebook parent Meta reports after the bell on 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 inflation in Europe eased earlier in the year, bringing some relief to consumers. But prices remain elevated, prompting a spate of protests and likely to push the European Central Bank for another rate hike on Thursday.

In Asia, shares in Shanghai rose 0.9% after surveys showed Chinese factory activity picked up in January but remains subdued amid weak global demand and COVID-19 outbreaks that have disrupted business.

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AP business writers Joe McDonald and Matt Ott contributed.

Stan Choe, The Associated Press