Stocks closed little changed as the Federal Reserve signaled the possibility of resuming its interest-rate hikes after pausing its tightening cycle in June to assess economic conditions.

The S&P 500 finished higher by just 0.1 per cent, recovering some ground after Jerome Powell said no decision has been made for the next few meetings. Treasury two-year yields, which are more sensitive to imminent Fed moves, climbed three basis points to 4.7 per cent. The dollar fell.

The Fed decision left the benchmark federal funds rate in a target range of 5 per cent to 5.25 per cent. Fresh quarterly Fed forecasts showed borrowing costs rising to 5.6 per cent by year end, according to the median projection, compared with 5.1 per cent in the previous round of projections.

Reaction to Fed:

• Edward Moya at Oanda:
  • “The Fed statement and projections were very hawkish, but Powell’s presser was a bit optimistic regarding their inflation fight and non-commital for a July rate hike. ​The S&P 500 recovered initial losses as traders believe the Fed is becoming a bit overly aggressive on what will be needed to get inflation all the way down.”​
• Andrew Slimmon at Morgan Stanley Investment Management:
  • “What I find fascinating is despite a hawkish tone from today’s Fed announcement, the S&P barely went negative. The reason is that retail and institutional assets remain drastically offsides and are looking for any pullback as an opportunity to increase exposure.”
• Chris Zaccarelli at Independent Advisor Alliance:
  • “The Fed is saying that they are going to continue to fight inflation by raising interest rates at future meetings, but what the market hears is that the Fed is close to stopping interest rate hikes and it’s time to put cash to work.”
• Neil Dutta at Renaissance Macro Research:
  • “What the hell do you expect them to do? Unemployment is not rising as much as they thought. Inflation is still firm. Growth is strong and the momentum behind it is favorable.”
• Mike Loewengart at Morgan Stanley Global Investment Office:
  • “The Fed may have paused today, as expected, but they probably raised a few eyebrows with their hawkish language — suggesting investors may have two more rate hikes to look forward to. The market’s initial pullback after the announcement showed how investors felt about that. But the inflation battle was always slated to be a long one, and there’s likely to be more bumps in the road for the market.”
• Greg McBride at Bankrate:
  • “The Fed is taking a breather. But it will likely be very short-lived, with rate hikes potentially resuming as soon as July. For now, the Fed will use this time to take in more data on inflation, the health of the economy, and tightening credit conditions before deciding what comes next.”
• Jason Pride at Glenmede:
  • “No rate hike this month does not necessarily mean that the Fed is finished raising rates this cycle. It is more likely that today’s decision will prove to be a ‘skip’ ahead of another rate hike at the July meeting than a prolonged pause in the rate hike campaign.”

Even with a pause in Fed hikes and an artificial intelligence boom that helped drive the S&P 500 into a bull market, there’s more pain ahead for stocks, according to Morgan Stanley’s Mike Wilson. 

He reiterated his year-end price target of 3,900 for the gauge, which implies an 11 per cent drop from Tuesday’s close.

“Our view is that inflation is going to come down, and while that potentially is very good for bonds, it’s not going to be good for stocks because that’s where the earnings power is coming from — this is really our boom-bust thesis.”

Key events this week:

• China property prices, retail sales, industrial production, Thursday
• European Central Bank President Christine Lagarde holds press conference following the rate decision, Thursday
• U.S. initial jobless claims, retail sales, empire manufacturing, business inventories, industrial production, Thursday
• Bank of Japan rate decision, Friday
• U.S. University of Michigan consumer sentiment, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 was little changed as of 4 p.m. New York time
• The Nasdaq 100 rose 0.7 per cent
• The Dow Jones Industrial Average fell 0.7 per cent
• The MSCI World index rose 0.2 per cent

Currencies

• The Bloomberg Dollar Spot Index fell 0.2 per cent
• The euro rose 0.3 per cent to US$1.0825
• The British pound rose 0.4 per cent to US$1.2659
• The Japanese yen rose 0.2 per cent to 139.97 per dollar

Cryptocurrencies

• Bitcoin was little changed at US$25,869.47
• Ether fell 0.6 per cent to US$1,728.33

Bonds

• The yield on 10-year Treasuries declined one basis point to 3.80 per cent
• Germany’s 10-year yield advanced three basis points to 2.45 per cent
• Britain’s 10-year yield declined four basis points to 4.39 per cent

Commodities

• West Texas Intermediate crude fell 0.9 per cent to US$68.79 a barrel
• Gold futures were little changed