Yields drop, stocks hold steady after Fed’s latest rate hike
Traders work on the floor of the New York Stock Exchange in New York on Wednesday, March 22, 2023. News of the Federal Reserve rate hike appears on a monitor in the background. (AP Photo/Seth Little)
By STAN CHOE (AP Business Writer)
NEW YORK (AP) – Stocks tumble on Wednesday after the Federal Reserve announced its latest rate hike while saying it may stop tightening the screws on the economy and Wall Street.
The S&P 500 was down 0.4% in afternoon trade. The Dow Jones Industrial Average was up 181 points, or 0.6%, to 32,378 at 3:06 p.m. Eastern time, while the Nasdaq Composite was 0.2% lower. All three indices were almost flat prior to the announcement.
The Fed, in its campaign to cut inflation, raised its key federal funds rate by a quarter of a percentage point, the same amount as its last hike. The move was exactly what Wall Street expected. The bigger question was where the Fed is headed next. There, the Fed indicated that it may not hike rates much more as it assesses the impact of the crisis on the banking industry.
Instead of repeating his long-standing stance that “ongoing hikes will be appropriate,” Fed Chair Jerome Powell made sure to say on Wednesday that he now only thinks “some additional monetary tightening is appropriate.” He emphasized the shift from “want” 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 3.99% from 4.13% just before the forecasts were released. Earlier this week it was over 5% and a drop of that magnitude is huge for the bond market.
The yield on the 10-year government bond, which helps set interest rates on mortgages and other major loans, fell to 3.49% from 3.61% late Tuesday.
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.
Just a few weeks ago, much of Wall Street was convinced that the Fed would increase the pace of rate hikes, given persistently high inflation and the tough discussions Fed officials were having about it. The bet was that the Fed would hike rates by 0.50 percentage point.
Higher interest rates can undercut inflation by slowing the economy. But they increase the risk of a subsequent recession and also hurt stock and other asset prices. The latter was one of the reasons behind the collapse of Silicon Valley Bank two weeks ago. Its bond investments fell in price as the Fed hiked rates last year at its fastest pace in decades.
Silicon Valley Bank also suffered what is known as a bank run, with its customers simultaneously withdrawing funds in a debilitating cascade. Since then, investors have been looking for the bank that could fall next and regulators around the world have been trying to boost confidence in the industry.
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 mean 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 seem almost like a rate hike on its own. And that was one of the reasons why the Fed decided to hike just 0.25 points instead of 0.50. He also said that he sees the overall banking system as strong and solid.
Last week the European Central Bank raised interest rates sharply, despite speculation that they could fall amid all the banking woes.
Its President, Christine Lagarde, said on Wednesday the path is remarkably open and she could hike rates further or halt them depending on how conditions develop.
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 US Treasury Secretary Janet Yellen hinted that the government could support depositors at more weakened banks if the system is compromised.
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. Across the Atlantic, regulators have also pushed ahead with a deal for a Swiss banking giant to buy its ailing rival.
On Wall Street, the biggest buzz has been around so-called “meme stocks.”
GameStop soared 37.8% 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.
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AP business writers Elaine Kurtenbach and Matt Ott contributed.