Futures slide on worries over hawkish Fed

(Reuters) – U.S. stock index futures fell on Thursday, a day after the Federal Reserve raised interest rates as expected, but confounded market expectations of a less hawkish stance by saying rates would remain higher for longer.

The U.S. central bank hiked rates by a widely anticipated 50 basis points (bps) on Wednesday, but Fed Chair Jerome Powell said recent signs of slowing inflation have not brought any confidence yet that the fight has been won.

The Fed’s policy-setting committee projected it would continue raising rates to above 5% in 2023 – a level not seen since a steep economic downturn in 2007 – quashing hopes the central bank would slow its hiking-cycle early next year.

Investors currently expect at least two 25-bps rate hikes next year and borrowing costs to peak at 4.9% by May next year, before falling to around 4.4% by year-end.

“The market’s optimism about a lower terminal rate and (rate) cuts in the second half of next year has been working against the Fed and are unrealistic in our view, unless we see a financial crisis or drain of liquidity in the markets that will necessitate the Fed to step in and lower rates,” said Maria Vassalou, co-chief investment officer of multi-asset solutions at Goldman Sachs (NYSE:) Asset Management.

“The Fed policy is negative for equities and likely to reinforce the inversion in the yield curve.”

Since October, when they hit year-lows, Wall Street’s main indexes have staged a strong recovery on hopes of a less aggressive Fed, but the rally stalled in December due to mixed economic data and worrying corporate forecasts.

A slew of economic data, including weekly jobless claims, retail sales data and industrial production, is due later in the day, as are interest rate decisions from the European Central Bank and the Bank of England. Both central banks are expected to hike borrowing costs by 50 bps.

At 05:02 a.m. ET, were down 282 points, or 0.83%, were down 43.25 points, or 1.07%, and were down 157 points, or 1.32%.

Shares of megacap companies, including Apple (NASDAQ:), Amazon.com Inc (NASDAQ:) and Microsoft Corp (NASDAQ:), fell about 1% each in premarket trading.

Tesla (NASDAQ:) Inc fell 2.8% after boss Elon Musk disclosed another $3.6 billion in stock sales, taking his total near $40 billion this year and frustrating investors as the company’s shares wallow at two-year lows.

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