US stocks opened modestly higher on Wednesday as investors awaited the outcome of the Federal Reserve’s policy meeting. The Dow Jones Industrial Average (DJIA) was up 0.2% shortly after the opening bell, while the S&P 500 (SPX) rose 0.1% and the Nasdaq Composite (COMP) gained 0.1%, according to FactSet data.
The Federal Reserve’s announcement on interest rates was eagerly anticipated, with financial markets prepared for an interest rate hike of 0.25%. This would bring the benchmark rate to a target range of 5% to 5.25%. It is hoped this measure will address inflation concerns exacerbated by a tight labor market and escalating trade tensions. Fed Chair Jerome Powell held a press conference to discuss the central bank’s decision.
Investors also monitored the US’s trade relationships, particularly with China, Mexico, and Canada. President Trump has been putting pressure on the latter two countries, demanding a renegotiation of the North American Free Trade Agreement (NAFTA). Furthermore, investors viewed the yield on the 10-year Treasury note, which hovered around 3.063% on the day of the meeting, as an indicator of the Federal Reserve’s policy decision.
Among notable stock movers, H&R Block Inc. fell more than 18% following the release of weaker-than-expected first-quarter results. Tesla Inc.’s stock dropped 2.2% after CEO Elon Musk announced the slashing of 9% of the company’s workforce. Meanwhile, Twitter Inc. soared 6% after joining the S&P 500 as an addition to the benchmark index. Additionally, Twenty-First Century Fox Inc. rallied more than 7% on reports of a counter bid for some of its assets by Comcast, following an initial agreement with Walt Disney Co.
Investors remained keen to see how US monetary policy would evolve, despite improving economic data in recent months. Indeed, some questioned whether this interest rate hike would be followed by further monetary tightening. St. Louis Federal Reserve Bank President James Bullard warned against this, stating that the FOMC should hold off any further policy moves. Bullard highlighted that inflation expectations were largely determined by crude oil prices and depreciation in the US dollar, rather than monetary factors.
Powell stated that the committee would continue to be guided by incoming data when setting interest rate policy. He noted that the risks to the economy from low unemployment rates were relatively low. Powell also held a press conference after the decision, in which it was confirmed that he will do so after every meeting from 2019 onwards, which may indicate a move toward greater transparency.
Other factors contributing to the rise in stocks were positive economic data, such as May’s consumer price index data, which showed a 0.2% rise in prices or 2.8% on an annual basis (the fastest rate since early 2012). Brent crude, the global benchmark for oil, rose 1% to trade around $76.50 a barrel, and West Texas Intermediate futures (WTI), the US benchmark, rose around 1% to trade at $66.64 a barrel.
Against this backdrop, investors were eager to see how the yield curve would respond to the central bank’s decision. This is particularly relevant given that the spread between short and long-term bonds has flattened lately. Historically, an inverted yield curve has often signaled a forthcoming recession. As a result, Powell’s announcement on the Federal Reserve’s policy and the interest rate hike was closely watched by markets.
In summary, US stocks opened higher ahead of a key announcement by the Federal Reserve on interest rates. The market awaited the possibility of an interest rate hike of 0.25%, only the second rate hike this year. As such, investors are closely monitoring the yield curve and trade relationships, as well as the Federal Reserve’s policy decision, as key indicators influencing market movements.
