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S&P 500 plunges below key supports as Fed signals higher rates, what’s next?

US stocks plunge after the Federal Reserve signaled that interest rates would remain higher for an extended period, despite keeping rates on hold in the September meeting.

Source: Bloomebrg

What the Fed says and what that means

In the highly-anticipated FOMC September meeting, the US central bank maintained its 2023 interest rate target range at 5.25% to 5.5%, suggesting that one more hike before the end of the year is almost certain.

At this stage, it appears that the possibility of a December hike is much higher than that of November, with the CME Fedwatch suggesting probabilities of 46% and 23%, respectively.

What disappointed the market the most is policymakers' anticipation of reduced-size monetary easing in the following year, with the median forecast for the federal funds rate expected to stay above 5% in 2024—a substantial increase from the June projection of 4.6%.

The quarterly-updated economic projections also indicated a lower expectation for core PCE-measured inflation by the end of 2023, forecasting that it will drop below 3% next year and return to the 2% target by 2026. The good news is that what appeared to be a distant possibility of a 'soft landing' for the US economy just three months ago now seems attainable, as the Fed raised its 2024 GDP growth target from 1.1% to 1.5%.

S&P 500 technical analysis

The Federal Reserve's commitment to keeping rates higher for longer has notably dampened risk appetite for US stocks, dragging the S&P 500 to trade below its two critical support levels: the 100-day SMA and the April-September trendline.

A further downtrend towards the August low at 4340 appears quite likely for now, potentially resulting in additional losses toward the critical 4288 level. In August 2022, this level triggered a sharp decline for two full months, resulting in an 18% broad-based decline.

On the flip side, buyers would need a close above the previous trendline near 4453 to restore their confidence; however, the 20 and 50-day moving averages (MA) are also close by, potentially acting as significant resistance at that level.

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