Markets fall as Fed raises interest rate by half a point

Fed chair Jerome Powell signalled further pain was in store for the stock market as inflation remains stubbornly high

The three leading stock market indexes tumbled after the Federal Reserve raised interest rates by half a point and signalled further rises were ahead in its fight to rein in inflation.

The Federal Open Market Committee on Wednesday increased its benchmark rate to a range of between 4.25 per cent and 4.5 per cent — the highest level in 15 years.

The rate rise was lower than the the past four three-quarter point hikes and had been widely anticipated by economists.

Federal Reserve chair Jerome Powell’s remarks that interest rates would have to remain high until inflation had been brought under control caused markets to fall sharply.

“Inflation data received to far for October and November show a welcome reduction in the monthly pace of price increases,” Mr Powell said at a post-meeting news conference.

“But it will take substantially more evidence to have confidence that inflation is on a sustained downward path.”

The Dow Jones fell by 600 points on the news before recovering slightly before markets closed at 4pm ET.

The S&P 500 dropped by about 1 per cent before staging a minor recovery.

Federal Reserve chair Jerome Powell (AP)

And the Nasdaq Composite was down by 1 per cent on the day, after it had rallied earlier in the day.

The Fed’s latest interest rate hike will raise the cost of borrowing for households and businesses and increase the chances of plunging the US economy into recession.

Fed policymakers also forecast their benchmark rate will rise to a range of 5 percent to 5.25 per cent by the end of next year, indicating they will make a further three-quarter percentage increase.

Consumer Price Index figures released this week showed inflation had dropped to 7.1 per cent year on year, from a 40-year high of more than 9 per cent in June.

While still uncomfortably high, the figure was less than some forecasts had anticipated and showed that inflation was slowing in the US.

In a statement, the Fed said it was “strongly committed” to returning inflation to its 2 per cent objective.