The U.S. Federal Reserve (Fed) announced on Wednesday that it has kept interest rates at a 22-year high, between 5.25 percent and 5.50 percent. 

Market responses to Fed's hike pause

Equity markets, particularly in the U.S., showed a decline even after the Fed decided to hold off on rate hikes, wrote Paul Walton, financial writer, and Arlan Suderman, chief commodities economist, from the Fortune 500 brokerage StoneX.

They pointed out that the Nasdaq fell by 1.3 percent, the S&P 500 by 0.8 percent, and the Russell 2000 saw a decrease of 0.3 percent. Global reactions were mixed: the FTSE 100 and DAX went up by 1.0 percent and 0.7 percent, respectively, whereas the Nikkei 225 slid by 0.7 percent. Heightening the market's unease, the CBOE Volatility Index (VIX), – also known as Wall Street's 'fear index' – climbed to 14.4.

Meanwhile, Matt Weller, head of market research at Gain Capital, pointed out that the Fed's hawkish stance strengthened the U.S. dollar. The U.S. Dollar Index rebounded after hitting a week's low; but meanwhile both the Japanese yen and UK Pound sterling decreased by 0.2 percent, while the euro ticked up by 0.1 percent.

Fed sees one more hike in 2023

The StoneX report highlighted heightened market concerns following the Fed's recent decision, saying that this sentiment arises from the Fed's committee's inclination towards an additional rate hike this year and expectations adjusting to only two quarter-point cuts in 2024, down from the initial forecast of four. 

Of the committee members, 12 anticipate a rate increase, while seven favor maintaining current rates.

Risk of higher bond yields

Walton and Suderman wrote that the recent surge in U.S. 10-year Treasury yields to a 16-year high of 4.35 percent while the 2-year yields climbed to 5.10 percent. This uptick means that the government is likely to incur higher borrowing costs, causing investors to be nervous about the U.S.'s economic stability and resulting in pricier borrowing costs for the public, they wrote.

They noted that the Fed plans to reduce its debt purchases, aiming to reverse some COVID-19-induced emergency measures. Further complicating the scenario, major foreign holders like China and Japan are now trimming their U.S. debt investments, they wrote.