NEW YORK — Stocks fell Wednesday after the Federal Reserve raised interest rates on the back of a strengthening job market and surprised investors by increasing its forecast for rate hikes next year. The dollar and bond yields rose sharply.
Utilities, real-estate investment trusts and other high-dividend stocks at risk of defection by income investors heading back to bonds fell more than the rest of the market. Energy stocks dropped with the price of oil.
KEEPING SCORE: The Dow Jones industrial average fell 71 points, or 0.4 percent, to 19,838, as of 3:45 p.m. The Standard & Poor’s 500 index was down 12 points, or 0.6 percent, at 2,259. The Nasdaq composite gave up 10 points, or 0.2 percent, to 5,453. Three stocks fell for every one that rose on the New York Stock Exchange.
CENTRAL BANK ACTION: The Fed raised a key short-term interest rate as it saw improvements in the U.S. economy and the possibility of higher inflation. It had kept rates close to zero since the Great Recession in hopes of driving economic growth and averting a downward spiral in prices, a condition that economists call deflation.
But the unemployment rate has dropped to 4.6 percent, its lowest level since before the Great Recession. Expectations for inflation have also jumped since Donald Trump’s surprise victory in last month’s presidential election.
Fed policymakers expect to raise the federal funds rate three times in 2017, up from their prior forecast of two.
That may have surprised investors, which led to the decline in stocks. Market strategists stressed that interest rates are still low.
“Overall, I don’t think the Fed’s move and shift in projections are a game changer for the markets,” said Brian Jacobsen, chief portfolio strategist at Wells Fargo Asset Management. “Monetary policy is still accommodative and we could be simply living through a long and protracted period where interest rates gradually rise.”
The central bank is walking a delicate balance: Higher interest rates make borrowing more expensive, which can slow corporate profits and economic growth, but one of the worst-case scenarios for the economy would be if inflation were to race higher because the Fed was too slow to raise rates.
BOND YIELDS: The yield on the 10-year Treasury note jumped to 2.55 percent, up from 2.47 percent late Tuesday, and continued its upward trend over the last month. That’s the highest that rate has been since September 2014.
The yield on the two-year Treasury rose sharply, to 1.25 percent from 1.17 percent, while the 30-year Treasury bond yield rose to 3.15 percent from 3.13 percent.
DIVIDEND STOCKS STRUGGLE: Higher yields make bonds look more attractive to investors seeking income, and that could mean less demand for stocks that pay dividends.
Utilities, real-estate investment trusts and other big-paying dividend stocks were some of the biggest winners in recent years as investors scrounged for income amid record-low rates. Those same sectors had some of the biggest declines following the Fed’s announcement.
Real-estate stocks fell 2 percent, the most among the 11 sectors that make up the S&P 500. Utilities fell 1.9 percent.
DOLLAR’S RISE: The dollar rose against many of its rivals. It climbed to 116.37 Japanese yen from 115.23 late Tuesday. The euro fell to $1.0557 from $1.0622 late Tuesday. The British pound fell to $1.2596 from $1.2667.
ECONOMIC DATA: Reports released Wednesday offered a mixed picture of the U.S. economy. Retail sales edged up by just 0.1 percent in November, a weaker showing than economists expected.
Inflation at the wholesale level was higher than expected last month, though economists said it still looks fairly tame, while industrial production weakened.
