Stocks saw their biggest decline since September after Jerome Powell said the Federal Reserve wants to keep its options open instead of rushing to cut interest rates.

Speaking after the January Fed decision, Powell said he doesn’t think it’s likely the central bank will ease policy in March. In a sign that officials are not in a hurry to lower rates, the central bank also said it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 per cent.”

“If stock bulls expected a rate cut in March, Powell seems to have closed the door on that,” said Oscar Munoz at TD Securities.

The S&P 500 fell 1.6 per cent. Losses were led by big tech — the group that has powered the bull-market run. Microsoft Corp. and Alphabet Inc. slumped after disappointing investors betting that an artificial-intelligence bonanza would quickly fuel results. After the close, Qualcomm Inc. gave a revenue forecast that was in line with estimates. Treasuries remained higher as fresh concerns about regional lenders added to economic worries after New York Community Bancorp’s surprise loss.

More comments on Fed:

Alan Ruskin at Deutsche Bank: “Phewww we got there in the end. Powell made everyone sweat, but it is pretty clear now where the Fed stands on March.”

Neil Dutta at Renaissance Macro Research: “Oh brother. What exactly does ‘greater confidence’ mean? Just feels like a bunch of nonsense to get the hawks to come to a consensus.”

Greg McBride at Bankrate: “The Federal Reserve is getting closer to the first interest rate cut, but we’re not there yet. Inflation has come down faster than anticipated, but whether or not this can be sustained is central to the Fed’s decision about when to begin cutting interest rates. The Fed is certainly pushing back on the notion of a March interest rate cut, dashing investors’ hopes again, but keeping options open and remaining non-committal as a central bank does.”

“Interest rates took the elevator going up — but are going to take the stairs coming down.”

Whitney Watson at Goldman Sachs Asset Management: “With steady economic growth, it is expected that policymakers will wait for more evidence of a sustained downtrend in inflation before making any changes. For investors, now is the time to secure attractive yields on high-quality bonds to earn attractive income and position for rate relief as central bank policy rates look set to end the year lower for the first time in two years.”

Chris Zaccarelli at Independent Advisor Alliance: “The Fed today officially acknowledged that they would like to lower rates in the near future, but have not yet given an indication of how soon they will begin the rate cutting process. Given that the Fed is planning to be higher for longer – but it’s not a matter of if, but when, they will be cutting rates – we believe the path of the stock market is higher. Ultimately, a recession or collapse in corporate earnings could derail the market, but in the absence of that, the path of least resistance is higher.”

Chris Larkin at E*Trade from Morgan Stanley: “Although the Fed softened some of its hawkish language, they also suggested it wasn’t yet clear that inflation was entirely under control. As usual, they said they’d let the economic data dictate their course. For a while, the debate has been whether the market is too optimistic about a March rate cut. Inflation has been a little stickier than expected lately, and the labor market has mostly continued to surprise to the upside.”

Data Wednesday showed a broad gauge of U.S. labour costs cooled by more than forecast in a fresh sign of easing inflation pressures that give Fed officials room to cut interest rates this year. A separate report from the ADP Research Institute showed companies added a smaller-than-expected 107,000 jobs in January, and worker pay growth slowed.

The market has been too quick to dismiss the threat posed by inflation after a “miraculous” decline toward central bank targets, said Greg Peters at PGIM Fixed Income. He’s worried that the hardest part of the fight against inflation is still ahead, implying plenty more market volatility and a potential wake-up call for bondholders betting on deep interest-rate cuts this year.

To Mark Hackett at Nationwide, the market is at critical crossroads as the strong momentum experienced since October is balanced against elevated expectations and sluggish earnings results.

Despite Wednesday’s losses, the S&P 500 capped its third straight monthly advance.

As goes January, so goes the year. That’s the theory of a phenomenon known as the “January Barometer” — Wall Street folklore positing that if stocks rise in January, they’ll be poised to finish the year higher, and vice versa. Since 1938, the January Barometer has been right about 74 per cent of the time, with the next 11 months higher 67 per cent of the time, according to the Stock Trader’s Almanac.

One of Wall Street’s most prominent bears is now expecting gains in the U.S. equity market to broaden into less loved corners than the big tech companies that have dominated the rally so far.

Morgan Stanley’s Mike Wilson, who stuck with his prediction of a stock market decline last year while the S&P 500 Index surged 24 per cent, sees opportunities in names outside the so-called Magnificent 7 companies that have powered equity gains through much of 2023. He’s urging investors to buy high-quality, growth names that can generate pricing power.

“In the stock world, I think once again, it’s going to be idiosyncratic — I don’t think it’s going to be as narrow as last year,” Wilson said Tuesday afternoon at the iConnections Global Alts conference in Miami Beach. “The big index is full, it’s priced. For all intents and purposes, the value is not there. The value is underneath the market.”

Meantime, the U.S. Treasury boosted the size of its quarterly issuance of longer-term debt for a third straight time, and suggested that no more increases are likely until next year. Relief from further boosts to auction sizes for longer-term securities may help support demand for Treasuries. Investors for several months now have been particularly sensitive to news on the overall supply of federal debt, at a time when the Fed has been steadily shrinking its own holdings of US securities.

“The February refunding came as a relief for markets as Treasury suggested the end of auction size increases starting in May,” said Gennadiy Goldberg at TD Securities. “However, there will be lots of duration supply hitting the market this year and Treasuries may continue to come under some pressure if economic data remains strong.”

Corporate Highlights

• Boeing Co. declined to issue a financial forecast for 2024, breaking a tradition of providing guidance as it deals with a string of quality slips that culminated in a near-catastrophic panel blowout on a 737 Max.
• Mastercard Inc.’s fourth-quarter earnings beat analysts’ forecasts even as operating expenses grew more than analysts expected.
• Biogen Inc. will stop studying and selling the controversial Alzheimer’s drug Aduhelm, capping years of debate over its efficacy and disappointment as it failed to meet commercial expectations.
• Health insurer Cigna Group agreed to sell its Medicare business to Health Care Service Corp. for $3.3 billion, the companies announced in a statement Wednesday.
• Saudi Arabia is considering plans to revive a follow-on offering in Aramco as soon as February, in a multibillion-dollar deal that’s likely to rank among the biggest share sales in recent years, according to people familiar with the matter.

Key events this week:

• China Caixin manufacturing PMI, Thursday
• Eurozone S&P Global Manufacturing PMI, CPI, unemployment, Thursday
• U.S. productivity, construction spending, ISM Manufacturing, initial jobless claims, Thursday
• Apple, Amazon, Meta, Deutsche Bank, BNP Paribas earnings, Thursday
• Bank of England interest rate decision, Thursday
• U.S. employment report, University of Michigan consumer sentiment, factory orders, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 1.6 per cent as of 4 p.m. New York time
• The Nasdaq 100 fell 1.9 per cent
• The Dow Jones Industrial Average fell 0.8 per cent
• The MSCI World index fell 1.1 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 0.2 per cent
• The euro fell 0.4 per cent to $1.0807
• The British pound fell 0.2 per cent to $1.2674
• The Japanese yen rose 0.3 per cent to 147.16 per dollar

Cryptocurrencies

• Bitcoin fell 2.3 per cent to $42,540.76
• Ether fell 3.9 per cent to $2,287.38

Bonds

• The yield on 10-year Treasuries declined nine basis points to 3.94 per cent
• Germany’s 10-year yield declined 10 basis points to 2.17 per cent
• Britain’s 10-year yield declined 11 basis points to 3.79 per cent

Commodities

• West Texas Intermediate crude fell 2.6 per cent to $75.76 a barrel
• Spot gold fell 0.1 per cent to $2,034.33 an ounce

This story was produced with the assistance of Bloomberg Automation.