The Latest: Stocks ending lower after Fed rate hike

AP News
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Posted: Dec 14, 2016 4:25 PM
The Latest: Stocks ending lower after Fed rate hike

WASHINGTON (AP) — The Latest on the Federal Reserve's monetary policy meeting (all times local):

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4:00 p.m.

Stocks are ending lower after the Federal Reserve raised a key interest rate as expected. But it also increased its forecast for how many rate hikes it expected to make in 2017, which wasn't widely anticipated.

The dollar rose against other currencies Wednesday and bond yields increased sharply. The yield on the 10-year Treasury note reached its highest level in more than two years. That rate is used to set interest rates on mortgages and other kinds of loans.

The biggest losers on the stock market were high-dividend companies like utilities and real estate companies that income investors tend to favor when bond yields are low. With bond yields on the rise, those stocks have less appeal.

Banks, which stand to benefit from higher interest rates because they can charge more to lend money, held up better than other parts of the market.

The Dow Jones industrial average fell 118 points, or 0.6 percent, to 19,792. The Standard & Poor's 500 index lost 18 points, or 0.8 percent, to 2,253. The Nasdaq composite gave up 27 points, or 0.5 percent, to 5,436.

Bond prices fell. The yield on the 10-year Treasury note rose to 2.58 percent, a big move up from 2.47 percent the day before.

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3:00 p.m.

After initially wobbling between gains and losses following the Fed's announcement, stocks turned moderately lower in afternoon trading following the rate increase decision.

Bond prices fell after the announcement Wednesday, sending bond yields higher.

High-dividend utilities and real estate companies, which would stand to lose more than other companies from rising interest rates, fell more than the rest of the market. Higher bond yields make those stocks less attractive to investors seeking income.

Banks, which would benefit from higher rates since they can charge more to lend money, held up better than other sectors. Goldman Sachs gained 0.5 percent.

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2:55 p.m.

Federal Reserve Chair Janet Yellen said that the economy doesn't need fiscal stimulus from the incoming Trump administration.

Tax cuts and infrastructure spending being championed by Trump would in theory generate stronger growth by increasing the budget deficits. It's the kind of fiscal support that both Yellen and her Fed predecessor, Ben Bernanke, called for in the past.

But Yellen said Wednesday at a news conference that such policies would be unlikely to maximize employment, since the unemployment rate is now at 4.6 percent, slightly below the Fed's own long-term target.

"I believe my predecessor and I called for fiscal stimulus when the unemployment rate was substantially higher than it is now," Yellen said.

The Fed chair emphasized that she was not providing advice or guidance to the incoming Trump administration with her statement.

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2:45 p.m.

Federal Reserve Chair Janet Yellen downplayed the expectations that Donald Trump's presidential victory could lead to faster rate hikes.

Median projections released after the Fed meeting that ended Wednesday indicate that Fed officials expect three rate hikes in 2017, up from two increases in the federal funds rate in their prior quarterly projections.

Yellen attributed the increase to the 4.6 percent unemployment rate and possibly some changes in federal budget policy beginning next year, although she emphasized that any changes to the projections were "modest."

"This is a very modest adjustment in the path of the federal funds rate," Yellen said.

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2:10 p.m.

Fed officials are not yet projecting much of a boost to growth from President-elect Donald Trump's policies over the next three years, despite market expectations that Trump's tax cut and deregulation proposals will lift growth.

Fed policymakers now expect the economy will expand 2.1 percent in 2017, barely higher than their earlier projection of 2.0 percent.

Many analysts predicted that Fed officials would make few changes to their quarterly economic forecasts, preferring instead to wait for signs of which policies would be enacted and when.

The Fed now sees the unemployment rate by the end of 2017 declining to 4.5 percent, slightly below its previous forecast of 4.6 percent. Yet the unemployment rate fell last month to 4.6 percent, much earlier than the Fed expected.

Fed officials made no changes to their forecasts for inflation, which they expect to reach 1.9 percent next year. It will hit the Fed's target of 2 percent in 2018 and remain there in 2019, they forecast. That contrasts with a sharp increase in the yield on the 10-year bond, which has jumped about a half point.

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2:05 p.m.

Federal Reserve policymakers now expect to raise their short-term interest rate three times next year, up from just two, amid slightly faster growth.

The increase represents a small turnaround for the Fed, which had cut its forecast for the number of hikes in 2017 in at least six previous meetings.

Fed officials maintained their outlooks for 2018 and 2019: they forecast three additional rate hikes each year.

By the end of next year, the Fed expects its short-term rate will be between 1.25 percent and 1.5 percent, and by the end of 2018, they forecast it will be between 2 percent and 2.25 percent. They see the rate between 2.75 and 3 percent by the end of 2019.

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2:00 p.m.

And we officially have a Federal Reserve rate hike, the second increase in more than 10 years.

Fed officials ended their final meeting of 2016 by raising the federal funds rate — what banks charge each other for short-term loans — to a range of 0.50 percent to 0.75 percent. The Fed previously increased rates at the December 2015 meeting from a near-zero level, an unprecedented low that was set in 2008 amid the fallout from the housing bust and financial meltdown.

The sluggish recovery has meant that Fed officials delayed a rapid rate increase, helping to stimulate economic activity by making it cheaper to borrow. The ten Fed officials voted unanimously for the rate hike, making it the first time since June that they all agreed.

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1:00 p.m.

Just an hour before the Federal Reserve announces whether short-term rates will be increased, U.S. stocks are essentially unchanged on the day. Investors have been anticipating the Fed's second rate hike in a decade for the better part of the past year. Fed officials ended 2015 by lifting the federal funds rate — what banks charge each other for overnight loans— from near-zero. Rates had been held at that historic low as the economy slowly recovered from the 2008 financial crisis.

Fed Chair Janet Yellen held off on a second rate hike for almost all of 2016. Along with her colleagues, Yellen has been looking for signs of rising inflation as the job market steadily improved. Fed officials have also been monitoring the global slowdown to ensure that any rate increase wouldn't destabilize growth.

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7:35 a.m.

U.S. shares are set to open flat as traders await the outcome of the Federal Reserve's final policy meeting of the year.

With financial markets pricing in a quarter-point rate hike as a near-certainty, more interest will focus on what Fed officials say about the outlook given low unemployment and the prospect of higher inflation in light of the recent rise in oil prices.

At present, the futures markets are pricing in another two interest rate hike next year.

Neil MacKinnon, global macro strategist at VTB Capital, says anything to suggest more than this would be interpreted as tilting the Fed to "a hawkish bias," especially if accompanied by a significant upgrade to inflation forecasts.

Anything hawkish could weigh on stock markets, already at record-highs, but give a further lift to the dollar.

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5:35 a.m.

Stock markets around the world are mostly lower and the dollar is stable as investors anticipate the Fed's first interest rate increase this year.

Given that it's a near certainty that the Fed will raise its benchmark interest rate by a quarter percentage point to a range of 0.50 percent and 0.75 percent, investor interest will revolve around what Fed officials and Fed Chair Janet Yellen in particular say about the pace of future increases.

After Asian indexes mostly closed lower, European indexes were down slightly. Britain's FTSE 100 and Germany's DAX were both 0.3 percent lower. Dow and S&P 500 futures were also down, by 0.1 percent.

The dollar was stable against Japan's currency, at 115.17 yen, and the euro was up almost 0.1 percent at $1.0637.

How the Fed manages its policies in coming months isn't clear against the backdrop of Donald Trump's election and might not be clear even after it issues a statement and Chair Janet Yellen holds a news conference.