NEW YORK – Wall Street’s excitement about a potential pause in the Federal Reserve’s aggressive tightening campaign was not enough to keep the stock rally going on Wednesday, with chairman Jerome Powell pushing back on interest rate cuts for now.
Even as the United States central bank pushed through its 10th rate hike and softened its language on future increases, Mr Powell said that it may be too soon to cut.
“We on the committee have a view that inflation is going to come down not so quickly,” he said in his post-meeting press conference. “It will take some time, and in that world, if that forecast is broadly right, it would not be appropriate to cut rates and we won’t cut rates.”
Mr Jason Pride, chief of investment strategy and research at Glenmede, said: “Potential Fed pause, but no Fed pivot yet. The Fed is telegraphing that additional monetary tightening may or may not occur, but rate cuts do not yet appear to be on the table.”
After the usual back-and-forth of Fed days, the S&P 500 erased a rally that approached 1 per cent, closing down 0.7 per cent to 4,090.75. The Dow Jones Industrial Average fell 0.8 per cent to 33,414.24, while the Nasdaq 100 dropped 0.6 per cent to 12,025.33.
In late trading, concerns over the stability of the US banking system resurfaced after Bloomberg News reported that PacWest Bancorp has been weighing a range of strategic options, including a sale.
The news sent the shares of the bank and several other US regional lenders tumbling in after-market trading.
Shares of PacWest tanked nearly 60 per cent, while Western Alliance Bank fell 30 per cent and Zions Bancorp, Comerica and First Horizon each slumped more than 7 per cent. The SPDR S&P regional banking exchange-traded fund dropped 5 per cent.
The dramatic falls underscore how investors remain unconvinced about the health of US regional banks despite regulators’ efforts to call an end to the banking crisis that started with the collapse of Silicon Valley Bank and Signature Bank in March.
This is setting the stage for more volatility on Thursday. Mr Powell said bank conditions had “broadly improved” since early March, but that the strains in the sector appeared to be “resulting in even tighter credit conditions for households and businesses”, following a tightening in credit over the past year.
There likely will not be a respite for the embattled regional banking sector until the Fed cuts interest rates, said Mr Jeffrey Gundlach, chief executive of investment management firm DoubleLine.
The Fed raised rates by another quarter point on Wednesday to a target range of 5 per cent to 5.25 per cent, the highest level since 2007. The vote was unanimous, and the Federal Open Market Committee omitted a line from its previous statement in March that said it “anticipates that some additional policy firming may be appropriate”.
But not even Mr Powell’s forecast for modest growth, instead of a recession, was able to embolden stock buyers for long on Wednesday.
For one thing, traders were already expecting the Fed to signal a pause after the May hike. Then, there is the fact that even if that happens as early as June, borrowing costs will remain high, curtailing credit in crucial corners of the US economy. Also, there is the heart of the problem – inflation.
History has shown that buying stocks at the end of a hiking cycle has proven to be a winning strategy in relatively low-inflationary environments like in the 1990s. But in the wake of inflationary pressures in the 1970s and beyond, stocks fell in the three months after every last hike, according to Bank of America. BLOOMBERG, REUTERS
