US stocks slip after the Fed hikes interest rates and hints more increases may be on the way

NEW YORK (AP) — U.S. stocks slipped Wednesday after the Federal Reserve hiked its main interest rate for the first time in three years and suggested more may be ahead as it tries to get the nation’s high inflation under control.

The S&P 500 fell 0.4% after giving up a modest gain from earlier in the day. The Dow Jones Industrial Average dropped 631 points, or 1.2%, and the Nasdaq composite was nearly unchanged after edging down by less than 0.1%.

Investors generally prefer lower interest rates because higher rates slow the economy’s growth and undercut prices for stocks and other investments.

The U.S. stock market initially held onto its modest, early gains after the Fed announced its decision. The short-term pain of a slower economy may be worth it if it starves inflation of its fuel and gets further increases for the cost of living back to the Fed’s 2% target.

But stock prices weakened later in the day as Fed Chairman Kevin Warsh said repeatedly in a press conference that inflation remains too high and the U.S. economy appears to be strengthening. That could imply the economy is solid enough to withstand more hikes to rates, and other officials at the Fed provided their own forecasts suggesting rates may need to go still higher.

The median Fed official expects the federal funds rate to end this year at 4.1%, according to forecasts published after the central bank’s meeting. That’s up from its current range of 3.75% to 4% following Wednesday’s increase, and it’s up from the median forecast of 3.8% that Fed officials gave three months ago.

Traders, meanwhile, suspect the Fed may go even further. They’re betting on a 38% probability the Fed could hike the federal funds rate to a range of 4.25% to 4.50% by the end of the year, according to data from CME Group.

“Our decision comes at a time when the American economy appears to be strengthening,” Fed Chairman Kevin Warsh said in his press conference.

He pointed to solid U.S. hiring trends, corporate profits and investments by businesses. A report on Wednesday morning, meanwhile, showed shoppers spent much more at U.S. retailers last month than economists expected.

“The plain fact is that inflation is too high and has been for too long,” Warsh said. He later added, “Today‘s action starts to show we’re serious about this.”