U.S. stocks fell in choppy trade Wednesday, led lower by energy and utilities, after the Federal Reserve raise rates for the second time in a decade.
The Federal Open Market Committee raised its target range from 0.25 percent to 0.5 percent to a range of 0.5 percent to 0.75 percent. The overnight funds rate currently sits at 0.41 percent. In addition to approving the much-expected increase, the FOMC also indicated a higher rate than projected back in September when it last released the quarterly look ahead. The committee now expects three rate hikes in 2017, two or three in 2018 and three in 2019.
The Fed projecting three rate hikes for next year "did catch people off-guard, but but [the Fed] did say four rate hikes for this year," said JJ Kinahan, chief market strategist at TD Ameritrade. "I think anyone who makes decisions on that is a bit silly because what we've seen with Janet Yellen is she let's the numbers tell the story."
The Dow Jones industrial average closed about 120 points lower after dropping more than 150 points following the Fed's announcement, with Caterpillar, 3M and Boeing contributing the most losses. The blue-chips index also hit a new intraday high earlier in the session.
"I think it's all about reality setting in," said Peter Cardillo, chief market economist at First Standard Financial. "I think we have to expect more volatility and less momentum buying."
The S&P 500 dropped about 0.8, with utilities and energy falling around 2 percent. The Nasdaq composite slipped 0.5 percent.
"What happened here was that nobody was expecting the third rate hike" in the central bank's forecast, said Tom Siomades, head of Hartford Funds Investment Consulting Group. "There was no data that would have necessitated that."
In a news conference following the Fed's announcement, Chair Janet Yellen said President-elect Donald Trump's plans to stimulate the economy with government spending figured into the central bank's expectations for three rate hikes next year.
"If there is a large fiscal stimulus then this will almost certainly create inflationary pressure that the Fed will have to fight by raising rates. It's far from clear how big any stimulus will be and what impact it will have. The Fed is as much in the dark about this as the rest of us," said Luke Bartholomew, investment manager at Aberdeen Asset Management.
Most market participants were expecting the U.S. central bank to raise rates by 25 basis points According to the CME Group's FedWatch tool, market expectations for a rate hike on Wednesday were almost 100 percent.
That said, the environment in which the Fed will likely raise rates is different than last year, said Thomas Wilson, senior investment manager at Brinker Capital. "A year ago, you had high-yield spreads that were at two-year highs. which were telling you something was wrong," he said. "This year, the macro environment has changed dramatically."
"The high-yield market is now giving you confidence the economy has improved," Wilson added.