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Wall Street turns higher after Fed hints at smaller hikes

US stocks climbed, reversing earlier declines after the Federal Reserve raised interest rates by 75 basis points but signalled that smaller rate hikes may be on the horizon.


The hike by the Fed, the fourth-straight increase from the central bank of that magnitude as it attempts to bring down stubbornly high inflation and set the target federal funds rate in a range between 3.75 per cent and 4.00 per cent, was tempered by new language that suggested the central bank was mindful of the effect its outsized rate hikes have had on the economy.


The S&P 500 is 0.3 per cent higher in mid-afternoon trade while the Dow Jones has added 1 per cent and the Nasdaq has advanced by 0.6 per cent. Markets will be glued to Fed chair Jerome Powell’s news conference, which is underway. The Australian sharemarket is set to retreat, with futures at 5.23am AEDT pointing to a fall of 16 points, or 0.2 per cent, at the open. The ASX rose by 0.1 per cent on Wednesday.


Investors had been widely anticipating a 75-basis point rate hike, while hoping the Fed would signal a willingness to begin downsizing the rate hikes at its December meeting.


“The Fed is finally acknowledging that they’ve already done a lot and it might be prudent to slow the pace of hikes,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments in Menomonee Falls, Wisconsin.


“You can’t keep popping pills until you feel better. Sometimes you have to wait for the medicine to take effect.”


The S&P 500 had been lower prior to the policy announcement, as the ADP National Employment report showed US private payrolls increased more than expected in October, giving more reason to the Fed to continue an aggressive path of rate hikes.


The private payrolls report came on the heels of data on Tuesday that showed a jump in US monthly job openings, indicating labor demand remained strong.


Investors will get more looks at the labour market in the form of weekly initial jobless claims on Thursday and the October payrolls report on Friday that will help drive expectations for interest rate hikes.


With nearly 70 per cent of S&P 500 companies having reported earnings for the quarter, growth estimates have moved slightly higher to 4.8 per cent from 4.7 per cent the previous day and 4.5 per cent at the start of October.


Advanced Micro Devices rose after it forecast some strength in its data centre business, while Airbnb tumbled on a bleak holiday-quarter revenue forecast.


Advancing issues outnumbered declining ones on the NYSE by a 1.33-to-1 ratio; on Nasdaq, a 1.16-to-1 ratio favoured advancers.


Earlier in the week, Meta Platforms lost nearly a quarter of its value after reporting a second straight quarter of revenue decline amid falling advertising sales and stiff competition from TikTok. Microsoft and Google’s parent company also reported slowdowns in key areas.


Such woes have created a sharp split on Wall Street this week, between lagging Big Tech stocks and the rest of the market. The Nasdaq, which is stuffed with high-growth tech stocks, notched a 2.2% gain this week. It would have had an even worse showing if not for Apple’s boost from Friday. The Dow, meanwhile, jumped 5.7% for the week because it has less of an emphasis on tech.


Rising interest rates have hit Big Tech stock prices harder than the rest of the market, and the pressure increased Friday as yields climbed.


“The markets still seem to not want to believe that we might end up in a place where an earnings recession is possible,” Young said.


Data released in the morning showed the raises that U.S. workers got in wages and other compensation during the summer was in line with economists’ expectations. That should keep the Fed on track to keep hiking rates sharply in hopes of weakening the job market enough to undercut the nation’s high inflation. Other data showed the Fed’s preferred measure of inflation remains very high, and U.S. households continue to spend more in the face of it.


The Fed is trying to starve inflation of the purchases made by households and businesses needed to keep it high. It’s doing that by intentionally slowing the economy and the jobs market. The worry is that it could go too far and cause a sharp downturn.


The Fed has already raised its benchmark overnight interest rate up to a range of 3% to 3.25% up from virtually zero in March. The widespread expectation is for it to push through another increase that’s triple the usual size next week, before it potentially makes a smaller increase in December. Higher rates not only slow the economy, they also hurt prices for stocks and other investments.

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