Why the US Markets Fell after Fed Chair Powell’s Speech

The US stock markets were trading higher after the rate hike announcement yesterday since the hike was mostly priced into the assets. However, they turned negative shortly before the market closed after fully assessing Fed chair Jerome Powell’s speech.

It was probably due to the removal of the word “accommodative” from the Fed’s policy statement. As Powell mentioned in the press conference, it doesn’t signal any change in the path of the monetary policy. That meant another rate hike in 2018 and hikes in 2019 are probably still on the table.

Yesterday, the S&P 500 Index (SPY) closed down 0.33%, driven by the SPDR S&P Bank ETF (KBE), which fell 2%. The Dow Jones Industrial Average (DIA) and the Nasdaq Composite (QQQ) fell 0.40% and 0.21%, respectively.

Increasing interest rates impact companies. They have to borrow funds to run their day-to-day businesses and expand. Higher rates might deter some investment and increase the cost of borrowing, which could impact companies’ earnings and stock prices. When rates increase, future cash flows, which are discounted at a higher rate, aren’t worth as much.

In the past few years, one of the factors fueling US equity markets (SPY) (QQQ) has been cheap money. The end of easy money could put the brakes on the economy. The concern is echoed by a lot of market participants and experts. JPMorgan Chase’s (JPM) CEO Jamie Dimon mentioned in August that unwinding the Fed’s unprecedented quantitative program could backfire on the economy or even spark a market panic.