Markets slip after latest Fed rate hike

NEW YORK — Stocks fell on Wednesday after the Federal Reserve announced its latest rate hike but said it wasn’t sure what would come next.

The S&P 500 fell 28.83, or 0.7 percent, to 4,090.75. The Dow Jones Industrial Average lost 270.29, or 0.8 percent, to 33,414.24 and the Nasdaq Composite slipped 55.18, or 0.5 percent, to 12,025.33.

The Fed’s move to raise interest rates by another quarter of a point was widely expected and is intended to further slow the economy in hopes of controlling inflation.

The hope on Wall Street is that this will be the latest hike after the Fed’s fastest excitement in decades. The central bank nodded to the possibility in its statement, dropping a note saying it “expects additional monetary tightening may be appropriate”.

“This is a significant change,” said Fed Chair Jerome Powell.

But the Fed came close to declaring the end of rate hikes that were already causing cracks in the US banking system, sending stock prices well below record highs and leading many investors to expect a recession later this year.

Powell also said that while traders are hoping for rate cuts later this year, which can act like steroids for the markets, he doesn’t expect them to happen any time soon. The next Fed meeting is next month.

Rather than sounding like a “hawk,” as Wall Street calls policymakers who want higher rates, or a “dove” who favors lower rates, Powell may have come across as something in between.

“He really seemed to jump from hawkish straight to not dovish, but chicken so far: you don’t know what’s going to happen,” said Brian Jacobsen, chief economist at Annex Wealth Management. “They want to keep the option to cut, they want to keep the option to hike, and they want to keep the option to hold. They want everything available because they really have no idea how things are going to play out. “

Another fly in the ointment, Jacobsen said, was Powell’s repeated references to a forthcoming survey that will show how many loan officers at banks say they are tightening lending standards.

The banking system has come under the most stress of any Fed rate hike, and three of the four biggest bank failures in US history have occurred in the last two months. The concern is that the turmoil in the industry could prompt banks to pull back on their lending. That in itself could act like rate hikes and further choke the economy.

The Fed is in a difficult position, however, as inflation remains well above the Fed’s 2% target and is still hurting households trying to keep up. Low-income households have come under particular pressure.

Powell said he still hopes the economy can avoid a recession, but he acknowledged that “we always have to balance the risk of not doing enough and not getting inflation under control and possibly the risk of too much.” slowdown in economic activity”.

After the collapses of Silicon Valley Bank, Signature Bank and First Republic Bank, investors continue to look for other potential vulnerabilities in the banking system. The sharpest scrutiny has been for small and medium-sized banks, which could experience sudden customer churn.

Shares of PacWest Bancorp, Western Alliance Bancorp and other peers fell again after the Fed’s decision, a day after trading in their shares halted amid steep price slides. PacWest is down 2 percent after rising earlier in the day. Western Alliance fell 4.4 percent.

On the other side was Eli Lilly, which rose 6.7 percent after reporting encouraging results from a study looking to treat Alzheimer’s disease. Kraft Heinz rose 2 percent after beating analysts’ forecasts for earnings and sales.

The majority of companies have so far made better profits than feared. However, given the impact of much higher interest rates and a slowing economy, expectations for this earnings season were low. The S&P 500 companies are likely still on track to report a second straight quarter of earnings declines.

Because of this, a lot of attention has been paid to what companies are saying about upcoming trends.

Advanced Micro Devices fell 9.2 percent despite reporting stronger-than-expected earnings and sales. It provided a sales forecast for the current quarter that fell short of some analysts’ expectations.

Reports on Wednesday offered some potentially encouraging data on the US economy. One indicated that the job market could be in better shape than expected. According to the ADP, hiring at private employers accelerated much faster than forecast last month. It could raise expectations for the federal government’s broader report on recruitment, which will arrive on Friday.

The job market has been one of the strongest pillars supporting the economy of late, although some mixed data recently suggested it could be weakening. On the one hand, the Fed sees this as helpful in bringing inflation closer to its target. On the other hand, a decline would greatly increase the risk of a recession.

In the bond market, the yield on the 10-year Treasury fell to 3.36 percent from 3.44 percent late Tuesday. It helps set interest rates on mortgages and other major loans.

The two-year yield, which is moving closer to the Fed’s expectations, fell to 3.88% from 3.99%.

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AP business writers Elaine Kurtenbach and Matt Ott contributed.