Wall Street closes lower after Fed Chair Powell says more hikes are ahead

Even though the Federal Reserve didn't hike its benchmark interest rate on Wednesday, it didn't lower it either.

So it remains at its highest level in 22 years.

Given that the Fed influences — directly or indirectly — interest rates on financial accounts and products throughout the US economy, that means savers and people with surplus cash still have many opportunities to get a far better return on their money than they've had in years — and even more importantly, a return that outpaces the latest readings on inflation.

Here are low-risk options to get the best yield on funds you plan to use within two years, and also on cash you expect to need within the next two to five years.

Read more here.

US stocks closed lower on Wednesday after the Federal Reserve announced it would keep interest rates steady but suggested that more hikes were on the horizon and that rates may remain higher for longer than previously expected.

Central bank officials said they would hold interest rates steady at their highest rate in 22 years but predicted in their “dot plot” that there would be at least one more hike this year and that cuts in rates wouldn’t begin until June of 2024, later than previously signaled. 

Markets struggled to find direction as Fed Chair Jerome Powell said in a press conference following the announcement that the Fed would “proceed carefully” in raising futures and that a recession remained a possibility.

Yields on the US 2-year Treasury yield soared to their highest levels since 2006 as investors worried about higher rates. 

Tech stocks also took a hammering as fears prevailed that growth stocks would be impeded by more hikes. 

Oil prices, meanwhile, sank 1% from previous highs as investors worried that a softening economy would limit energy demand. 

In corporate news, shares of Arm and Instacart, which both made their market debuts in recent days, pared back initial gains, down 4.1% and 10.7%, respectively. 

The Dow closed 77 points, or 0.2% lower on Wednesday.

The S&P 500 lost 0.9%.

The Nasdaq Composite was down 1.5%.

A slew of recent surveys indicate Americans are pessimistic about the economic outlook, even in spite of positive data. Similarly, polls also show Americans are displeased with President Joe Biden's handling of the economy.

But their feelings about the economy may be somewhat tainted, Federal Reserve Chair Jerome Powell told reporters on Wednesday.

"I think a lot of it is — just people hate inflation," he said, "and that causes people to say the economy is terrible."

"At the same time, they are spending money and their behavior is not what you would expect from the surveys," Powell said.

The latest University of Michigan consumer sentiment index showed Americans are becoming more anxious about the US economic outlook. The index hit an all-time low in June 2022, the same month that inflation, as measured by the Consumer Price Index, peaked at 9.1%.

Joanne Hsu, director of the university’s Surveys of Consumers, attributed last month's decline to consumers sensing that rapid improvements in inflation they saw in prior months "have moderated."

While someone with a long-term fixed-rate mortgage may be able to endure elevated interest rates, Americans living month-to-month off their credit cards likely find interest rates punitive, conceded Federal Reserve Chair Jerome Powell at a press conference on Wednesday.

But, he added, elevated inflation is worse for people on a fixed income than temporarily higher rates.

People without any meaningful savings who spend all their income on the basics of life (like clothing, food, transportation and heating) are in "trouble right away" if prices go up by 5%, said Powell. 

"It is for those people as much as anybody that we need to restore price stability. We want to do it as quickly as possible," he said. "Obviously we would like the current trend to continue, which is that we are making progress without seeing the kind of increase in unemployment that we have seen in past hikes."

But, he added, when the Fed raises rates, people who live on credit cards and borrowed money are going to feel the punch more than people with lots of savings.

A looming government shutdown could not only serve as an economic headwind but also could limit the Federal Reserve’s ability to get key data, Fed Chair Jerome Powell said Wednesday.

But to what extent, Powell stayed mum.

"We don't comment on government shutdowns," Powell said. "It's possible, if there is a government shutdown and it lasts through the next meeting [which concludes November 1], it's possible we wouldn't be getting some of the data that we would ordinarily get, and we would have to deal with that."

Earlier in Wednesday's press conference, Powell acknowledged a potential shutdown as part of a "long list" of factors that could affect Fed policy and the economy.

"It's the strikes, it's the government shutdown, resumption of student loan payments, higher long-term rates, oil price shock," Powell said. "There are a lot of things that you can look at. So, what we try to do is assess all of them and handicap all of them."

He added: "Ultimately, though, there is so much uncertainty around these things."

Federal Reserve Chair Jerome Powell indicated Wednesday that one or more rate hikes this year won't make or break the economy.

"I wouldn't attribute huge importance to one hike in macroeconomic terms," said Powell. "Nonetheless, we need to get to a place where we're confident that we have a stance that will bring inflation down to 2% over time."

The Fed on Wednesday held interest rates steady for September and indicated that it could raise rates one more time this year, after hiking 11 times since last March to tamp down skyrocketing prices.

Powell reiterated the Fed's 2% inflation target during his post-policy meeting press conference.

While inflation has come down dramatically since last year, it still remains stubbornly above that goal.

The Personal Consumption Expenditures index, the Fed's preferred inflation gauge, rose 3.3% annually in July. The core PCE index gained 4.2% for the 12 months ended that same month.

Markets have been eagerly looking for signs of interest cuts, cleaving to every word Federal Reserve Chair Jerome Powell says — even if Powell says his predictions should be taken with a grain of salt.

Powell appeared to give rate cuts a subtle thumbs-up at the last meeting.

At first, he said, "we’d be comfortable cutting rates when we’re comfortable cutting rates, and that won’t be this year, I don't think." Then he implied cuts could come next year saying that "many people" penciled it in.

On Wednesday, Powell effectively tried to walk back those comments saying that when he answers "hypothetical" questions about cutting he "never" intends to "send a signal about timing."

"I'm just answering them as the question is expressed," Powell told reporters on Wednesday.

The Fed's Summary of Economic Projections shows Fed officials believe there'll be at least two rate cuts next year. In June, they were projecting four rate cuts.

The Federal Reserve has a tough job making sense of America's economic data and predicting the future on a good day. Add a United Auto Workers strike, oil prices nearing $100 a barrel, gas prices hitting $4 in 11 states and the possibility of a government shutdown ... and that makes for a very tricky job for Fed economists.

"Forecasting is very difficult," Federal Reserve Chair Jerome Powell conceded in a press conference Wednesday. "Forecasters are a humble lot, with much to be humble about."

In particular, Powell said the wrenches thrown into the economy's gears make forecasting even more difficult.

"Ultimately, though, there is so much uncertainty around these things," he said.

UAW strike

Powell declined to comment on the politics of the strike. But he said among the many unknowns are the effect on America's economic output, hiring and its impact on inflation.

"That's going to depend on how broad it is and how long it's sustained for, and it also depends how quickly they can make up for lost production," Powell said. "So none of those things are known now. It's very, very hard to know."

Oil prices

On energy prices, Powell said "that is a significant thing" for consumers and the economy.

"Energy prices being up can affect spending," he said. "A sustained period of higher energy prices can affect consumer expectations about inflation."

Shutdown

On the threat of a government shutdown, Powell also declined to comment on the politics but said it's hard to say in advance how it might affect the economy.

"It would depend on all kinds of factors I don't know about now, but it's certainly a reality that that's a possibility," Powell noted.

Markets stumbled on Wednesday afternoon after Federal Reserve Chair Jerome Powell said that a soft landing, where the US economy avoids a recession but successfully lowers inflation, was not a "baseline expectation" for central bank officials.

"I've always thought that the soft landing was a plausible outcome, that there was a path to a soft landing," he said during a press conference. "Ultimately, this may be decided by factors that are outside of our control."

It is possible to avoid recession, said Powell, but stressed that restoring price stability is the Fed's top priority.

While a soft landing "is the end we are trying to achieve," he said, "I wouldn't want to handicap the likelihood of it." 

Still, he reiterated that "a soft landing is a primary objective," and "what we have been trying to achieve for all of this time."

The Dow was 120 points, or 0.4% higher on Wednesday afternoon.

The S&P was 0.2% lower.

The Nasdaq was down 0.4%.