Stock Market Today: Dow Jones, S&P 500, Nasdaq Drop Wednesday As Fed Announces Interest Rate Increase

Major U.S. stock indexes took a nosedive following the Federal Reserve Chair Janet Yellen’s announcement that it would raise its target for the federal funds rate—a bank-to-bank lending rate closely followed by mortgage, bond and other interest rates—for the first time in a year.

The Dow Jones Industrial Average (DJI) fell by as much as 138.16 points, or about 0.7 percent, with the release of Yellen’s statement, and closed at 19,794.80. Over the same period, the S&P 500 (GSPC) dropped 18.28 points, or 0.8 percent, closing at 2,252.45, and the Nasdaq Composite index (IXIC) fell by 35.96 points, or nearly 0.7 percent, before closing at 5,435.82. By market close, the three indexes had mostly recovered from the initial plunge, something Tom Girard, senior managing director and head of fixed income at mutual life insurance company New York Life, called a “knee-jerk reaction.”

The three indexes had vacillated in the hours leading up to Yellen’s 2:30 p.m. press conference, in which she pointed to "solid" job growth and higher inflation as reasons to raise the rate to between 0.5 and 0.75 percent, from a band of between 0.25 and 0.5 percent.

Yellen also said the Fed would push for three interest rate hikes next year, which would ultimately bring the target to a range of between 1.25 and 1.5 percent. This, according to Greg McBride, the chief financial analyst at consumer financial services firm Bankrate, was what may have worried traders, especially those who had planned for only two increases.

“Investors don’t like the idea that rates are going to up faster in 2017,” McBride told IB Times. “Any time there’s a possibility of interest rates being higher than expected, investors throw a hissy fit.”

Still, he added that when the Fed decided to lift the target for the federal funds rate in December 2015, the central bank announced similar plans, only for them to ultimately fall through.

“Let’s not get ahead of ourselves,” said McBride about rate interest rate expectations. “We were promised four hikes [for 2016], and we only got one.”

The Fed’s decision to begin working to normalize the interest rate by hiking it to near pre-recession levels is expected to have an adverse impact on consumers and business owners seeking loans for large investments, like homes, cars, machinery, equipment and other large durable goods, as lending will become more expensive. Because it also pushes up the value of the dollar, the Fed’s interest rate increase also hurts American businesses reliant on customers abroad when their goods become relatively more expensive on international markets.

Combined with a $1 trillion stimulus plan under President-elect Donald Trump, the negative ripple effects of the Fed’s interest rate hike could lead to a period of economic instability in the U.S., according to McBride.

“I think we will see a lot of volatility in the months ahead," he said.