The three major stock indexes fell Wednesday as Federal Reserve Chairman Jerome Powell announced a new interest rate hike of 0.25 percent — the ninth rate hike in a year and the first after two weeks of banking turmoil — bringing the benchmark funds rate to a range of 4.75-to-5 percent.
The interest rate-setting Federal Open Market Committee strongly considered pausing rate hikes in light of the crisis of collapsing banks that started March 10, but stayed the course because data on inflation and the labor market was already coming in stronger than expected, Powell said at a news conference.
The market believes that the Fed will cut rates several times later this year, wrote James “Rev Shark” DePorre for The Street. DePorre runs sharkinvesting.com, an interactive online community for active investors.
“Markets are, so far, not trusting the ability of the Fed to treat inflation and financial stability independently,” analysts at ING wrote in a note to clients on Thursday. “This looks unlikely to change soon.”
The market is getting it wrong by predicting rate cuts this year, Powell said. The central bank’s summary of economic projections published Wednesday anticipates slow growth, a gradual decline in inflation and a rebalancing of supply and demand in the labor market.
“In that most likely case, if that happens, participants don’t see rate cuts this year,” Powell said, adding that uncertainty lies ahead for the economy but rate cuts are not currently in the central bank’s “baseline expectation.”
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The Dow Jones Industrial Average dipped by as much as 271.53 points during the press conference, down 0.83 percent. The S&P 500 and the Nasdaq Composite also fell by 0.75 percent and 0.59 percent. However, stocks recovered in Thursday morning trading.
The S&P 500 rose 1.5 percent by noon Thursday, with technology stocks climbing. The Nasdaq composite rose more than 2 percent.
The interest rate increase — which comes after U.S. regulators bailed out banks and ensured they have enough cash to stay afloat — will hurt consumers’ savings, loans, credit cards and investments, Jeanne Sahadi wrote for CNN.
“Returns on savings accounts and CDs are the best in 15 years,” said Greg McBride, chief financial analyst for Bankrate.com. “But the average credit card rate is now at a record high above 20 percent, auto loan rates are at a 12-year high and mortgage rates are still north of 6.5 percent. It is as important as ever for savers and borrowers to shop around to get the benefit, or minimize the impact, of rising interest rates.”
Powell acknowledged that the recent issues in the banking system will create tighter credit conditions for households and businesses, which would in turn affect the economy. “It is too soon to determine the extent of these effects, and therefore too soon to determine how monetary policy should respond,” Powell said.
A credit crunch happens when banks significantly tighten their lending standards.
Two weeks ago, officials likely planned to hike interest rates by at least half a percentage point, Nicole Goodkind wrote for CNN. The banking meltdown complicated that strategy. Policymakers don’t want to hike interest rates and risk further damage to the system in the wake of the banking meltdown, but Fed officials also worry about persistent inflation, Goodkind wrote.
Fears of a bank run cause lenders to take fewer risks with their capital reserves to ensure they have enough cash to cover any potential withdrawal requests, said analysts at Pantheon Macroeconomics. That makes them “disinflationary events,” they wrote in a note on Tuesday.
The banking meltdown could have an equivalent effect on the economy of a 1.5 percent rate hike by the Fed, said Torsten Slok, chief economist at Apollo Global Management.
“In other words, over the past week, monetary conditions have tightened to a degree where the risks of a sharper slowdown in the economy have increased,” he wrote in a note.