Stocks Lower as Fed Signals Potential Rate Hike Yet GDP Slows

Stocks tip lower as Wall Street continues to chew over a strong signal from the Federal Reserve that a December interest rate hike is on the table. Signs of a cooling economy emerged in the Q3 GDP report as well.

Stocks fell initially following release of the Fed’s statement, a largely balanced view of domestic and global economic uncertainties that the central bank hopes are fleeting, allowing the bank to return to the business of removing easy monetary policy. The Fed took a pass on a rate hike this month, inaction that was widely expected on Wall Street, but leading indexes did rally into Wednesday’s close (figure 1).

Fed statements tend to strike a mixed reaction—investors generally bristle at the thought of losing accommodative policy that has fueled a bull stock market but they’ve been newly worried in recent weeks that a global slowdown could worsen. In that case, the Fed’s ability to apply modest rate hikes could be seen as an endorsement of a strengthening U.S. economy. The Fed emphasized its belief that it can move slowly once it acts. The lone dissent came from known hawk Jeffrey Lacker, who wanted a quarter-point hike now.

Key Words

In its statement, the Fed noted slower but promising job growth, low inflation, and weaker energy prices. It said it’s watching global developments. But the passage that landed firmly hinted at timing went like this: “In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress—both realized and expected—toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.”

By the Numbers

The CME Group’s FedWatch Tool, calculated based on pricing in the Fed funds futures market, shows traders are pricing in about a 43% shot for a rate hike in December—up from the 35% odds priced in right after the Fed statement release. Traders in this market see a 67% chance for a hike in March.

GDP: Don’t Blame Consumers

Gross domestic product —the value of everything a nation produces — rose at a 1.5% annual pace from July through September. That’s well below the 3.9% rate recorded in Q2. The slowdown stemmed mostly from the smallest increase in inventories in a year and a half, Market Watch reported. Yet even as businesses showed more caution, consumers continued to spend at steady clip. Consumer spending—the single largest determinant of U.S economic growth—rose at a 3.2% annual pace following an even larger gain in Q2.

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