Stocks drop, Treasury yields rise as Fed meeting begins

US stocks fell on Tuesday as investors prepared for Federal Reserve officials to raise interest rates again in their battle against persistent inflation.

The Standard & Poor’s 500 Index is down 1.7% in afternoon trading, while the Dow Jones Industrial Average is down 500 points, or 1.6%. The tech-heavy Nasdaq Composite Index is down about 1.5%.

While Wall Street awaits the outcome of the meeting, US 10-year Treasuries are still well above 3.5%, their highest level since 2011, while two-year Treasuries are racing towards 4%.

The Federal Open Market Committee on Policy begins its September meeting today and is expected to deal with a third consecutive increase of 75 basis points to the benchmark interest rate at the conclusion of discussions on Wednesday. After the officials meeting, investors will wait for Federal Reserve Chair Jerome Powell’s speech for more clues about the pace and scale of future hikes.

“The third ‘unusually large’ surge will be a reversal of the plan Powell laid out in July to slow the pace of tightening, despite the little surprise on the grid in the data,” Goldman Sachs economists led by Jan Hatzius wrote in a note. .

“We see several reasons for the change in plan: the stock market has threatened to undo some of the tightening in financial conditions designed by the Fed, labor market strength has dampened fears of over-tightening at this point, and it now appears that Fed officials want somewhat faster and More consistent progress toward reversing overheating, and some may have reassessed the short-term neutral price.”

Bank of America expects the Fed’s point plan – every official’s forecast for the central bank’s key short-term interest rate – to show an “implied slowdown” in the pace of increases at its November meeting. But analysts suggest that Powell is likely to dismiss this signal and continue to stress that increases will depend on data to maintain Fed discretion.

WASHINGTON, DC – SEPTEMBER 19: Renovation work continues on the Marriner S. Eccles Federal Reserve Building on September 19, 2022 in Washington, DC. The Federal Open Market Committee (FOMC) is scheduled to hold its two-day meeting on interest rates starting September 20 (Photo by Kevin Deitch/Getty Images)

“In other words, if the data warrants another 75 basis point rate hike in November, we don’t think the committee will be constrained by its previous forecast,” Bank of America analysts led by Michael Gaben said in a note. “We believe the Fed will rely less on forward guidance and more on data as the policy rate moves more in the restricted area.”

On the corporate front, Ford (F) shares fell more than 12% Tuesday afternoon after the company warned of rising costs due to inflation and supply chain challenges, making it the latest company to outline its struggle with macroeconomic challenges.

The Detroit-based old automaker now expects supply costs to total $1 billion more during the quarter than it previously estimated and supply shortages to affect about 40,000 to 45,000 vehicles, shifting some revenue into the fourth quarter.

Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter Tweet embed

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