Hawkish FOMC dampens market sentiment

Hawkish FOMC dampens market sentiment

When the opening bell sounded, the markets immediately started to move higher. However, this initial move higher was short-lived. Many times, it is typical for momentum to run dry on days with the Federal Open Market Committee (FOMC) meeting on schedule.

It’s not unreasonable to assume that markets are trading sideways as big money on Wall Street is getting into position prior to the FOMC meeting. In doing so, a massive amount of cash flows on both sides of the market, causing price action to trade sideways into the event. 

When it was time for the Federal Reserve (Fed) to announce the final 2022 rate hike, the anticipated decision of a 50 basis point hike came to fruition. Initially, this would come off as a bullish catalyst, but some statements dampened the mood. 

The Fed stated that the path of rate increases continuing through 2023 is likely. This information implies that this hike won’t be the last. The data has shown that further hikes may be appropriate into the new year. Pairing the hawkish words with an announcement that was likely already priced into the market, the reaction quickly became negative—falling 50 points in the S&P 500 futures before Powell took the stage for questions. 

Price action surrounding FOMC announcements

When we examine price action surrounding previous hawkish FOMC minutes, today’s price action should come as no surprise. Unfavorable economic data leading into the FOMC minutes indicated market participants expected another rate hike. Expectations were priced into the market well in advance of today’s announcements. 

Yesterday’s article also touched on what a bear case would look like for this meeting by stating:

“For a bear case, the market will look for Powell to be uncommitted to ongoing rate decreases. If Powell states that this was a one-time decrease, this will dampen the catalyst.”

When Powell took the stage today, he continued to confirm that there was more work before committing to another rate decrease. Powell said, “we can’t tell you we won’t move up the estimate of peak rate at a future meeting.”

The U.S. Rate futures expect a 70% chance of a 75 basis point hike in the next meeting come February. 

Market falls on Fed

The Nasdaq and the S&P 500 were negative to close the session. The S&P 500 futures closed up 0.44%, losing 17 points, while the Nasdaq futures closed down 0.62%, a decrease of 73 points. The Dow Jones futures followed, closing down 0.30%, falling 102 points.