US stocks drop as Federal Reserve hikes interest rate to curb inflation

US stocks dropped and Treasuries were little changed as investors parsed the Federal Reserve’s policy statement for clues on the path for interest rates. Chairman Jerome Powell is set to speak at 2:30 pm in New York.

The S&P 500 briefly fell to session lows before fluctuating after the Fed raised rates by a quarter percentage point as expected. The accompanying statement signaled officials expect further increases, though changes in the language sparked optimism that a pause could be in the offing if inflation data continue to cool.

Stocks rallied in January, contributing to an easing of financial conditions, as investors speculated signs of cooling inflation had brought the central bank closer to the end of its hiking cycle. But in a sign that officials may soon debate when to halt its increases, the committee said the “extent of future increases” in interest rates will depend on a number of factors including cumulative tightening of monetary policy.

It had previously tied the “pace” of future increases to those factors.

“I see no signs yet that the Fed is open to 2023 rate cuts. I’m not sure the Fed is even trying for a soft landing. While they would never say so, they might prefer the restorative aspects of a recession and a proper bear market,” said Bill Zox, portfolio manager at Brandywine Global.

After Wednesday’s announcement, investors will turn focus on when the Fed will pause its rate hikes, said Richard Flynn, managing director at Charles Schwab UK.

Meanwhile, inflation in the euro area slowed more than economists’ expectations in January, according to a report. The core measure remained sticky, however, suggesting a heated debate to come at the European Central Bank over how much more interest rates must rise. The central bank is expected to lift its policy rate by 50 basis points on Thursday.

“Headline inflation continues to fall across the eurozone but core inflation, which strips out food and energy, flatlined,” said John Leiper, Chief Investment Officer at Titan Asset Management. “Price pressure, particularly in the services sector, will remain elevated for some time. Given the economy is holding up far better than predicted we expect the ECB to hike interest rates again on Thursday by a widely anticipated 50 basis points.”