Fed Hikes Interest Rates for First Time in Three Years, Stocks Fall

The Federal Reserve raised interest rates for the first time in three years, citing high inflation and a strengthening economy. The decision sparked a decline in U.S. stocks, with the S&P 500 falling 0.4% after initially holding onto modest gains. The Dow Jones Industrial Average dropped 631 points, or 1.2%, while the Nasdaq composite was nearly unchanged.

Investors prefer lower interest rates because higher rates slow economic growth and undercut stock prices. However, Fed Chairman Kevin Warsh emphasized that inflation remains too high and the economy appears to be solid enough to withstand further rate hikes. The median Fed official expects the federal funds rate to end this year at 4.1%, up from its current range of 3.75% to 4%. Traders predict a 38% probability of the Fed hiking rates to a range of 4.25% to 4.50% by year's end.

Bank stocks, such as Huntington Bancshares and JPMorgan Chase, fell sharply due to potential reduced loan demand in a slower economy. The yield on two-year Treasuries jumped to 4.74%, while the longer-term 10-year Treasury yield increased to 5.01%. Oil companies also weighed on the market after Brent crude prices dropped 2.7% to $105.83.