Federal Reserve Board Chairman Jerome Powell delivers a news conference following a meeting of the Federal Open Market Committee at the Federal Reserve March 22, 2023 in Washington, DC.
Alex Wong | News from Getty Images | Getty Images
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The markets had expected the Fed’s quarter-point hike. They were caught off guard by Powell’s warnings about the economy.
- Fed officials unanimously approved a rate hike. However, at the post-meeting press conference, Fed Chair Jerome Powell admitted that the committee considered suspending rate hikes because “events in the banking system over the past two weeks are likely to result in tighter credit conditions.”
- Asked by a senator if the Treasury Department was considering guaranteeing all bank deposits without Congressional approval, Treasury Secretary Janet Yellen said it was not.
- PROFESSIONAL GameStop rose 35.24% on news that the company had its first profitable quarter in two years. However, analysts are warning investors not to buy into the stock as it still faces longer-term headwinds.
Recent meetings of the Federal Open Markets Committee followed a specific pattern. The central bank would adopt a hawkish stance and aggressively raise interest rates, which would spook markets. Then Powell’s comments at the press conference would reassure investors, who would focus on his dovish remarks (probably unintentional and to his chagrin, I suppose).
This time, Powell flipped the script.
Markets expected a 25 basis point hike and they got it. Being right contributes to a sense of security, so all three major indices actually rose following the Fed’s announcement. In fact, Quincy Krosby, LPL Financial’s chief global strategist, noted that “markets are responding well to the expected 25 basis point rate hike.”
Then Powell began to speak. First, his reassurances that the “banking system is sound and resilient” further reassured markets. Powell then spoke of “tightening credit conditions for households and businesses” that “could easily have a significant macroeconomic impact.” Worse, those conditions weren’t reflected in stock indices because they “do not necessarily capture credit conditions.” This signaled that the economy could be worse off than many had thought, wrote CNBC’s Patti Domm.
As if to prove Powell wrong, markets began to slide about an hour after Powell’s speech and couldn’t stop their decline. At the end of the day, the Dow Jones Industrial Average was down 1.63%, the S&P 500 was down 1.65% and the Nasdaq Composite was down 1.6%.
They certainly weren’t helped by Treasury Secretary Janet Yellen’s clarification that, contrary to how markets took Tuesday’s comments, the Federal Deposit Insurance Corporation is not considering “blank insurance” for bank deposits – as I warned in yesterday’s newsletter.
The good news is that the Fed forecasts it will only hike rates once more – likely by another 25 basis points – before pausing. A cut is not on the table, however, if Powell is to be believed. Amid the ongoing banking turmoil coupled with the Fed’s warning about the broader economy, investors might be better off not fighting the Fed.
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