US stocks fell from near two-week highs on Wednesday after US Federal Reserve chairman Jerome Powell re-stated his commitment to curb inflation even as the Fed signalled it might soon pause future interest rate hikes amid recent turmoil in financial markets.
As expected by many investors, the Fed raised interest rates by 25 basis points, and omitted from saying in its latest policy statement that “ongoing increase” in rates will likely be appropriate.
Markets initially interpreted the omission as a sign that rates might be peaking, and drove Treasury yields to session lows after the Fed’s statement was released.
However, in his press conference, Powell reiterated his desire to tame inflation by saying that the Fed will do “enough” to bring inflation down to 2%, and that it will raise rates higher if it needs to.
The hawkish note drove US stocks lower. The Dow Jones Industrial Average fell 530.49 points or 1.63% to 32,030.11, the S&P 500 dropped 65.90 points or 1.65% to 3,936.97 and the Nasdaq Composite Index pulled back to end down 190.15 points or 1.6% to 11,669.96.
“Should the stresses in the financial system be reduced in short order, we cannot rule out that stronger macro data will lead the Fed to put in additional rate hikes beyond May,” said Michael Gapen, an economist at Bank of America Securities.
“But for now, we think that risks are in the direction of an earlier end to the tightening cycle.”
Treasury investors appeared to agree. The two-year yield which falls with traders’ expectations of a less hawkish Fed, fell to 3.9597% from Tuesday’s close of 4.177%. The yield on benchmark 10-year Treasury notes retreated to 3.4509% from Tuesday’s 3.606%.
Global markets have been thrown into chaos in the past two weeks after the sudden failures of US lenders Silicon Valley Bank and Signature Bank, and an emergency sale of beleaguered Swiss banking behemoth Credit Suisse.
Efforts by regulators and policymakers globally to counter the convulsions in the banking sector have helped stem contagion and a rout in equity markets though many investors fear other smaller lenders could be next in line to fail as credit markets tighten.
The upheaval sparked by the collapse of SVB is not yet over with a significant number of banks expected to fail within two years, hedge fund Man Group CEO Luke Ellis said at a conference in London on Wednesday.
“I think we will have significantly more banks that don’t exist in 12-24 months,” Ellis said, adding that he thought smaller and regional banks in the US and challenger banks in Britain could be at risk.
First Republic Bank was also in focus after efforts to secure a capital infusion continued without success on Tuesday. The stock shed 15.5% late on Wednesday after Treasury Secretary Janet Yellen said there is no discussion to insure all deposits. – March 23, 2023