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NYTimes
New York Times
22 Mar 2023


NextImg:Stocks Drop After Fed Raises Rates Despite Banking Turmoil

Stocks on Wall Street skidded lower in late trading on Wednesday, after swinging between gains and losses earlier as investors sought to balance the Federal Reserve’s decision to raise interest rates by a quarter of a percentage point, while simultaneously acknowledging that stress in the banking sector would also restrict the economy.

The S&P 500 rose sharply soon after the decision was announced, before eventually falling 1.7 percent for the day. Trading had been muted in the morning, as investors awaited the Fed’s decision.

The Fed’s task on Wednesday was a challenging one; to remain tough on stubborn inflation that has driven up prices for households across America, while addressing the recent stress in the banking system caused in part by the rapid increase in interest rates intended to address rising prices.

The central bank initially appeared to thread the needle and stock prices jolted higher as its decision was announced. But as trading continued, and Fed chair, Jerome H. Powell, answered reporters questions, the rally eased, with some investors left unsatisfied that the central bank chief had done enough to quell concerns about the continued fallout from the bank collapses in recent weeks.

“This is the Fed making the same policy error that it has routinely made in its history,” said Don Calcagni, chief investment officer for wealth manager Mercer Advisors. “I think the Fed is slow to react to significant stress in the banking system.”

In the bond market, the two-year Treasury yield, which is sensitive to changes in interest rates, fell sharply to below 4 percent, as bets mounted that Wednesday’s interest-rate increase could potentially be the Fed’s last.

The Fed has been raising interest rates to restrict the economy and slow inflation. That was part of the reason for the flare up in the banking sector in recent weeks, and now that same financial-system stress could apply even more pressure on the economy, removing some of the need for the Fed to keep raising interest rates.

“This is being viewed as either the last, or close to the last, hike,” said George Goncalves, head of U.S. macro strategy at MUFG Securities. “They were going to be really aggressive on inflation, but the banking crisis has done it for them.”

Reeling from a series of bank collapses that prompted intervention from regulators around the world and generated violent swings in financial markets, investors, analysts and economists had been left guessing about what the Fed might do on Wednesday — uncertainty that had been reflected in whipsaw trading over the past two weeks.

Typically, the Fed likes to set investors’ expectations, leading them to the likely outcome of rate decisions, limiting any potential market fallout from a surprise move. But Mr. Powell’s last public comments came just days before regulators took control of Silicon Valley Bank, with the Fed chair testifying to Congress that he was open to raising interest rates more quickly in response to data that showed inflation stubbornly embedded within the economy.

As the economic backdrop sharply shifted since Mr. Powell’s comment, investors were left in the dark about what the central bank would do — stick to earlier plans, or adjust to the new set of circumstances.

After a bout of banking turmoil that reverberated around the world, many had begun to believe that the Fed could instead leave rates unchanged.

PacWest, a Los Angeles lender that has come under pressure alongside other regional banks, said it had tapped emergency cash after a 20 percent drop in its deposits since the start of the year.

The announcement sent PacWest’s stock price tumbling, down about 17 percent for the day, dragging the share prices of other regional banks lower as well. The moves illustrated the tumultuous backdrop preceding the Fed’s decision to raise interest rates.

“I think the Fed is underreacting,” Mr. Calcagni said. “I think there is more stress in the financial system than the Fed thinks.”