US pre-open: Stocks set to drop after hawkish Fed

US futures pointed to a weaker open on Wall Street as investors digested a more hawkish than expected tone from the Federal Reserve.

At 1130 BST, Dow Jones Industrial Average futures were down 0.5%, while S&P 500 and Nasdaq futures were off 0.7% and 1.2%, respectively.

On Wednesday, the Federal Reserve lifted interest rates for the second time this year by 25 basis points to between 1 and 1.25%, as expected, with Chair Janet Yellen reiterating that inflation is expected to return to target and forecasting one more hike this year. However, she added that policymakers will be watching low inflation numbers closely after some disappointing readings.

Ahead of the announcement, market participants had been of the view that there would be no further rate increases this year following the tame inflation reports.

Investors were also surprised by the Fed's plans to shrink its $4.5trn balance sheet as these were more aggressive than expected.

FXTM research analyst Lukman Otunuga said: "Financial markets were caught completely off guard during late trading on Wednesday after the Federal Reserve adopted a firmly hawkish stance and even displayed some optimism over economic growth despite mounting concerns over weak inflation. The tone of caution investors were anticipating from the Fed was replaced by a strong determination to continue tightening in response to falling employment while accepting the prolonged periods of weak inflation this year.

"Although the hawkish surprise offered a temporary boost to the dollar, markets have not bought into this newfound optimism as expectations of another interest rate increase in 2017 currently stand below 50%."

In corporate news, supermarket operator Kroger was trading a little higher ahead of its earnings before the opening bell.

On the macroeconomic front, NY Empire State manufacturing, initial jobless claims, the import and export price indices and the Philadelphia Fed manufacturing survey are at 1330 BST.