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Wall Street’s main indexes see-sawed before slumping in the final 30 minutes of trading to end Wednesday lower, as investors digested another supersized Federal Reserve hike and its commitment to keep up increases into 2023 to fight inflation. The Canadian benchmark stock index also saw volatile trade, ending down nearly 1% at its lowest level in more than two weeks.

All three U.S. benchmarks finished more than 1.7% down, with the Dow posting its lowest close since June 17, with the Nasdaq and S&P 500, respectively, at their lowest point since July 1, and June 30.

At the end of its two-day meeting, the Fed lifted its policy rate by 75 basis points for the third time to a 3.00-3.25% range. Most market participants had expected such an increase, with only a 21% chance of a 100 bps rate hike seen prior to the announcement.

However, policymakers also signaled more large increases to come in new projections showing its policy rate rising to 4.40% by the end of this year before topping out at 4.60% in 2023. This is up from projections in June of 3.4% and 3.8% respectively.

Rate cuts are not foreseen until 2024, the central bank added, dashing any outstanding investor hopes that the Fed foresaw getting inflation under control in the near term. The Fed’s preferred measure of inflation is now seen slowly returning to its 2% target in 2025.

In his press conference, Fed Chair Jerome Powell said U.S. central bank officials are “strongly resolved” to bring down inflation from the highest levels in four decades and “will keep at it until the job is done,” a process he repeated would not come without pain.

“Chairman Powell delivered a sobering message. He stated that no one knows if there will be a recession or how severe, and that achieving a soft landing was always difficult,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management.

Higher rates and the battle against inflation was also feeding through into the U.S. economy, with the Fed’s projections showing year-end growth of just 0.2% this year, rising to 1.2% in 2023.

“Markets were already braced for some hawkishness, based on inflation reports and recent governor comments,” said BMO’s Ma. “But it’s always interesting to see how the market reacts to the messaging. Hawkishness was to be expected, but while some in the market take comfort from that, others take the position to sell.”

Economist David Rosenberg, one of the most bearish voices on Bay Street, said the Fed’s actions and projections on Wednesday cements his view that a recession is unavoidable and stock markets will be feeling more pain.

“Powell continuing to tighten policy into an economic downturn will do more than just kill inflation. It will kill the economy in the process,” he said in a note to clients. “As for the stock market, fundamental recession bear phases only end once the Fed is deep into the ensuing rate-cutting cycle, and the central bank is now telling us this isn’t happening until 2024. Be prepared for a long period of economic malaise and a bear market in risk assets.”

The Toronto Stock Exchange’s S&P/TSX composite index ended down 184.15 points, or nearly 1%, at 19,184.54, its lowest closing level since Sept. 6.

The TSX energy sector fell 2.3% as the Fed’s hawkish message offset concerns of tighter oil and gas supply after an escalation of the war in Ukraine. U.S. crude oil futures settled 1.2% lower at $82.94 a barrel.

Russian President Vladimir Putin mobilized more troops for Ukraine and threatened to use all of Russia’s arsenal against what he called the West’s “nuclear blackmail” over the war there.

But markets largely shrugged off his new threats.

“The comments that Putin made are pretty long-term in terms of when they’re actually going to manifest themselves in reality with the deployment of reserve troops, or if there is eventually some sort of nuclear conflict, that’s not today,” said Thomas Simons, money market economist with Jefferies in New York. “It puts the market on alert, but I don’t think it necessitates a big position shift.”

Heavily-weighted financials lost 1.2%, while the TSX materials group, which includes precious and base metals miners and fertilizer companies, ended 0.2% lower.

It included a 4.4% decline for the shares of Teck Resources Ltd after the company reported a plant outage at its Elkview steelmaking coal operation.

The Dow Jones Industrial Average fell 522.45 points, or 1.7%, to 30,183.78, the S&P 500 lost 66 points, or 1.71%, to 3,789.93 and the Nasdaq Composite dropped 204.86 points, or 1.79%, to 11,220.19.

All 11 S&P sectors finished lower, led by declines of more than 2.3% by Consumer Discretionary and Communication Services.

Volume on U.S. exchanges was 11.03 billion shares, compared with the 10.79 billion average for the full session over the last 20 trading days. The S&P 500 posted two new 52-week highs and 70 new lows; the Nasdaq Composite recorded 44 new highs and 446 new lows.

Benchmark 10-year notes rose to 3.64%, the highest since February 2011, before tracing the increase to be little changed. The yield curve between two-year and 10-year notes inverted further to minus 51 basis points, indicating concerns about a recession in the next one-to-two years.

The bond yields retraced from their highs after Powell said that the so-called “dot plot” of rate and economic expectations do not represent a plan or commitment, underscoring the difficulty in forecasting the path of the economy.

“With recession looking virtually impossible to avoid, we see a strong chance of policy reversal later in 2023,” analysts at ING said in a note, adding that “despite the hawkishness of the Fed today, the market is tentatively pricing in nearly 50bp of rate cuts in 2023.”

Reuters, Globe staff

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