U.S. stocks got smoked on Wednesday after the Federal Reserve raised interest rates by a quarter percentage point amid a fast-moving banking crisis and Chair Jerome Powell suggested rate cuts were not in the picture this year.
The S&P 500 (^GSPC), the Dow Jones Industrial Average (^DJI) and the technology-heavy Nasdaq Composite (^IXIC) all dropped by about 1.6%.
U.S. government bond yields dipped. The benchmark 10-year Treasury yield slid to 3.4%, while on the front end of the yield curve, two-year yields dropped 3.9%. Oil prices gained, with WTI crude up to $70 a barrel.
The Federal Reserve’s policy-making committee, headed by Powell, took center stage Wednesday. The Federal Reserve raised its benchmark rate 0.25% to a 4.75%-5% target range, citing some additional policy firming may be appropriate. Additionally, the Fed said it would continue the same pace of reducing treasury and mortgage-backed security holdings.
“On net, we think the Silicon Valley Bank (SVB) episode and the fallout for the broader regional banking sector will work to slow credit, economic activity, and eventually inflation, resulting in the Fed needing to do less of the heavy lifting to tighten financial conditions,” Tiffany Wilding, PIMCO North American Economist, wrote in a statement following Powell’s press conference.
“As a result, we believe that the Fed is likely at the end of their hiking cycle. Nevertheless, pivoting to holding policy at restrictive levels, is different than starting the process to normalize or even ease policy. Indeed, the timing and speed of any rate cutting cycle will depend on how inflation and financial stability risks evolve overtime,” Wilding added.
To that point, the Fed’s latest dot plot forecasts — which maps out policymakers’ expectations for where interest rates expected to head in the near future — showed that rates will edge higher this year.
In his press conference, Powell said that he didn’t foresee rate cuts this year, though he told Yahoo Finance’s Jennifer Schonberger that he believes financial conditions have tightened.
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