Stocks fall, bond yields tumble after Fed’s latest rate hike

NEW YORK (AP) – Stocks fell sharply on Wednesday after the Federal Reserve indicated the end of its economy-damaging rate hikes may be near, but it also doesn’t expect to cut rates anytime soon, despite Wall Street hopes .

The S&P 500 fell 1.6% for the first time in three days. The Dow Jones Industrial Average lost 530 points, or 1.6%, while the Nasdaq Composite slipped 1.6%.

Some of the sharpest declines came again from the banking sector, where investors are concerned that more banks may fail if customers withdraw their money at once. They slipped after Treasury Secretary Janet Yellen said she was not considering blanket protection for all depositors at all banks unless they posed a risk to the wider system.

Before the banking crisis, stocks had been little changed for most of the day.

Instead of repeating its statement that “ongoing hikes will be appropriate,” the Fed said on Wednesday that it now believes only “some additional monetary tightening is appropriate.” Chairman Jerome Powell emphasized the shift from “will” to “can”.

The Fed also released the latest forecasts from its policymakers on where interest rates will head in the coming years. The median forecast had the federal funds rate at 5.1% at the end of this year, just a little higher than it currently is, in a range of 4.75% to 5%.

That’s also the same level as in December, and it’s at odds with market fears it could rise amid persistently high inflation.

This helped plunge yields in the bond market, which saw some of the wildest action this month.

The two-year Treasury yield, which is trending in line with expectations for the Fed, fell to 3.96% from 4.13% just before the forecasts were released. Earlier this month it was above 5%.

Part of this month’s slide also stemmed from hopes of rate cuts by the Fed later this year. Such cuts can push up the prices of stocks, bonds, and other assets and give the economy more breathing room. But they can also fuel inflation.

Powell said on Wednesday the Fed is still focused on bringing inflation to its 2% target and does not intend to cut rates this year. He also said that even after a pause, the Fed could start raising rates again if high inflation called for it. That gave the market some momentum.

“Economic indicators are still pretty robust,” said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute. “For markets to still speculate on a rate cut, it probably won’t happen this year if the Fed has its way.”

“There were about a dozen or so instances where he kept bringing it back to inflation. For better or for worse, he was pretty consistent.”

The Fed faced a difficult decision as it weighed whether to continue raising rates to bring down inflation or hikes in the face of the pain it’s already causing for the banking industry that could take a toll on the rest of the economy , should weaken. The second and third largest US bank failures in history both occurred in the past two weeks.

One concern is that too much pressure on the banking system, particularly the smaller and mid-sized banks at the center of investors’ crosshairs, would result in less lending to businesses across the country. That, in turn, could lead to fewer new hires and less economic activity, increasing the risk of a recession, which many economists already rate as high.

Powell said such a pullback in lending could almost seem like a rate hike in its own right. And that was one of the reasons why the Fed chose to hike just 0.25 points instead of 0.50 on Wednesday. He also said that he sees the overall banking system as strong and solid.

Markets around the world have tumbled this month on worries that the banking system could collapse under the pressure of much higher interest rates. They found some strength recently after Yellen hinted on Tuesday that the government could support depositors at more weakened banks if the system is at risk.

That could mean ensuring that even customers with more than Federal Deposit Insurance Corp. get all their money within the insured limit of $250,000. On Wednesday, however, Yellen said she was not considering blanket protection for all depositors at all banks, only those “if there is a systemic risk involved”.

Small and mid-sized bank stocks fell sharply. First Republic Bank fell 15.5% and PacWest Bancorp fell 17.1%.

Some of the biggest excitement has been the so-called “meme stocks.”

GameStop soared 35.2% after reporting a surprise profit for its most recent quarter. Analysts expected another loss for the ailing video game retailer.

The stock rocked Wall Street in early 2021 as hordes of smaller-pocket and inexperienced investors rushed in, sending its price soaring and inflicting huge losses on hedge funds betting on its downfall.

Overall, the S&P 500 fell 65.90 points to 3,936.97. The Dow fell 530.49 to 32,030.11 and the Nasdaq fell 190.15 to 11,669.96.

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AP writers Elaine Kurtenbach, Matt Ott, and Fatima Hussein contributed.