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Stock Market Today: Stocks Tumble After Hawkish Fed Rate Hike; 2-Year Yields Top 4.1%

Stocks ended sharply lower Wednesday following a hawkish Fed rate hike that pushes bets on the first bit of monetary easing out until at least 2024.

Updated at 4:15 pm ET

Stocks finished sharply lower Wednesday after the Federal Reserve delivered its third consecutive jumbo-sized rate hike, while signaling that even tighter monetary policy will be needed over the coming months in order to tame the fastest inflation in more than four decades.

The Fed lifted its Fed Funds rate by 75 basis points, matching the biggest move since 1994 as well as two similar moves earlier this year, to a range of 3% to 3.25%. Fed Chair Jerome Powell noted during his press briefing that he and his colleagues expect another 1% to 1.25% in rate hikes between now and the end of the year, although he noted that they're "still debating" the ultimate size of collective near-term rate hikes.

Markets are now pricing in a 'peak" Fed Funds rate of around 4.6% in the first quarter of next year even as the Fed sees an unemployment rate of only 4.4% in 2023, with the earliest rate cut not anticipated until at least 2024.

"You can only steer the ship towards the storm for so long, but eventually there comes a time when you need to batten down the hatches and with the Fed’s third consecutive 75 basis point rate hike over the past four months, market participants should be looking for cover to weather the upcoming storm," said Charlie Ripley, senior Investment strategist with Allianz Investment Management in Minneapolis. "Chairman Powell reiterated the Fed’s hawkish stance with another aggressive rate hike and set the tone for markets to prepare for a tougher economic situation ahead as the battle against inflation endures."

However, with the core measure of the Fed's preferred inflation gauge, the PCE Price Index, showing signs of retreat, and the Fed's rate signaling suggesting a least another 1% to 1.25% in hikes between now and the end of the year, investors may look for comments from Chairman Jerome Powell as to when, rather than if, the Fed will begin considering a pause in monetary tightening.

Powell wasn't prepared to commit to a time frame on easing, only insisting that the Fed wouldn't consider slowing or reversing rate hikes until inflation was moving convincingly towards its 2% target.

The Dow Jones Industrial Average finished down 522 points, or 1.70%, to 30,183, while the S&P 500 lost 1.71% and the tech-heavy Nasdaq fell 1.79%.

Benchmark 10-year Treasury note yields eased to 3.512%.

The U.S. dollar index, meanwhile, rose 1.1% to a near 20-year high against a basket of its global peers to change hands at 111.245 in the immediate wake of the Fed announcement.

Benchmark Treasury bond yields, which move in the opposite direction of prices, moved higher following the Fed rate hike, with 2-year notes trading at a 2007 high of 4.123% before easing to 3.999%. 

"Focusing on the Fed’s interest rate decision totally misses what’s most important. FOMC members significantly increased their projections for inflation, unemployment and interest rates over the next two years and lowered their GDP growth forecasts," said Morning Consult chief economist John Leer. "Even the Fed is growing less confident in its ability to achieve a soft landing."

The prospect of hawkish rate signaling later this week from the Bank of England, the Swiss National Bank and the Bank of Japan, however, is likely to keep rate elevated and stocks on the back foot.

In Europe, however, the Stoxx 600 closed 0.87% higher in Frankfurt trading as the single currency eased to 0.9914 against the greenback. That followed a 1.4% decline for the MSCI ex-Japan index in Asia as stocks in China sunk to a four-month low on growth concerns in the world's second-largest economy.

U.S. gasoline prices were also in focus after rising for the first time in more than three and a half months and snapping a near 100 day run of declines, amid an overnight leap in crude oil prices.

Data from the American Automobile Association indicates the national average pump price rose by less than a penny, to $3.681 per gallon, ending a streak of 98 consecutive days of declines, the longest downward stretch since 2005.