NEW YORK — Stocks had their worst day in two months after the Federal Reserve raised interest rates Wednesday on the back of a strengthening job market and surprised investors by increasing its forecast for rate hikes next year. The dollar's value jumped against other currencies, and bond yields climbed to their highest levels in years.
The rate increase, which was only the Fed's second in the last decade, was widely expected across the market. But investors were surprised to see the Fed project three more increases for 2017, up from a prior forecast of two. Higher rates can slow corporate profits and economic growth.
The Standard & Poor's 500 index fell 18.44 points, or 0.8 percent, to 2,253.28, its biggest percentage loss since mid-October. The Dow Jones industrial average fell 118.68 points, or 0.6 percent, to 19,792.53. The Nasdaq composite fell 27.16, or 0.5 percent, to 5,436.67.
The yield on the 10-year Treasury note touched its highest level in more than two years and sat at 2.57 percent late Wednesday, up sharply from 2.47 percent a day earlier. Bond yields have been in an upward trend for the last month, and the yield on the two-year Treasury reached its highest level since the summer of 2009. It was trading at 1.27 percent late Wednesday, up from 1.17 percent.
The dollar jumped more than 1 percent against several of its rivals, including the euro and the Japanese yen.
The Fed raised its key short-term rate by a quarter of a percentage point to a range of 0.50 percent to 0.75 percent. Following the rate increase announcement, Fed Chair Janet Yellen stressed that changes to its projections were modest.
Analysts also said investors shouldn't panic about the prospect for more increases for interest rates, which are still very low by historical standards. Plus, the Fed doesn't always follow through with projections. Just look at a year ago, says Rich Taylor, client portfolio manager at American Century.
"Remember that last year, they said they would increase rates four times," Taylor says. "Then they said two, and then by June, it was one, and we just got that one 15 minutes ago."
Inflation expectations have climbed since Donald Trump's surprise victory in last month's election, but inflation still remains relatively tame. That's part of why Taylor continues to expect only a gradual rise in interest rates.
Investors reacted to the Fed's announcement Wednesday by selling stocks that would be most hurt by higher interest rates.
Dividend-paying stocks had been big winners in recent years as investors turned to them in search of income given record-low bond yields. The worry is that traditional bond investors who had defected to dividend stocks will return to bonds now that yields are rising again.
Utility stocks in the S&P 500 fell 2 percent, and real-estate stocks fell 1.9 percent.
Energy stocks had the sharpest declines among the 11 sectors that make up the S&P 500 and fell 2.1 percent, dropping along with the price of oil. Benchmark U.S. crude fell $1.94 to settle at $51.04 per barrel in New York. Brent crude, the international standard, lost $1.82 to $53.90 a barrel in London.
Four stocks fell for every one that rose on the New York Stock Exchange, including Wells Fargo. The bank dropped $1.14, or 2 percent, to $54.70 after federal regulators placed restrictions on the bank due to concerns about its "living will," which lays out its plan of action in the event of a failure.
Hertz Global Holdings fell $2.09, or 8.3 percent, to $23.04 after the struggling car rental company named a new chief executive officer. The company's three longest-serving directors will also leave the board next month.
Among the few gainers for the day was Neustar, which jumped $5.80, or 21 percent, to $33.45 after a group of private investors said it would buy the communications company for $33.50 per share in cash.
In Europe, Britain's FTSE 100 stock index dipped 0.3 percent, while Germany's DAX fell 0.4 percent and France's CAC 40 lost 0.7 percent.
In Asia, Japan's Nikkei 225 finished nearly unchanged, while South Korea's Kospi and Hong Kong's Hang Seng index also were up marginally.
Among commodities, natural gas rose nearly 7 cents to settle at $3.54 per 1,000 cubic feet. Wholesale gasoline fell nearly 2 cents to settle at $1.53 a gallon.
Gold rose $4.70 to settle at $1,163.70 an ounce. Silver rose 24 cents to settle at $17.22 an ounce, and copper rose less than a penny to settle at $2.60 per pound.
The dollar 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.