Wall Street's initial reaction to Wednesday's interest rate increase was a decline, but by Thursday morning markets had settled and even ticked higher as bond yields eased back from multi year highs.
On Wednesday, the S&P 500 fell about 0.4 percent and the Dow Jones Industrial Average shed more than 600 points, while the Nasdaq 100 finished nearly flat. The moves came immediately after the Fed's quarter point rate increase and the release of updated projections showing officials expect one or two more hikes could follow this year. That combination, a hike plus a hawkish outlook, is often the hardest for markets to absorb, since it removes hope of an imminent pause.
The selloff followed a rough stretch for bonds. In the days leading up to the Fed decision, the 10 year Treasury yield climbed to its highest level in nineteen years and the 30 year yield rose to 5.37 percent, as oil prices kept climbing on the back of the ongoing Middle East conflict. Higher yields make borrowing more expensive across the economy and tend to weigh on stock valuations, particularly for growth focused companies.
By Thursday, some of that pressure eased. Treasury yields pared their gains, with the two year note slipping slightly after touching its highest level since 2024, and the 10 year and 30 year yields both ticked down a couple of basis points. Equity futures rose after Fed Chair Kevin Warsh's press conference reassured investors that the central bank's approach was measured rather than aggressive. A broad U.S. market gauge rose nearly 0.6 percent on Thursday, clawing back part of Wednesday's loss, even though the index remains down slightly over the past month.
Traders will be watching whether oil prices, which have been the main driver of this inflation scare, continue to climb or start to ease, along with any fresh signals from Fed officials ahead of the October meeting.
Why did stocks fall right after the Fed raised rates, if the hike was expected?
Investors were less focused on the hike itself, which was widely anticipated, and more on the Fed's updated projections suggesting further hikes could follow this year.