Stocks Plummet Following Fed Decision To Raise Rates 25 Basis Points

U.S. stocks ended lower Wednesday, erasing a brief rally following the Federal Reserve chair’s suggestion that the central bank’s latest quarter-point rate increase could mark the end of the current tightening cycle, amid ongoing concerns over the banking system and the economy.

Wednesday’s increase brings the Fed’s benchmark lending rate to a range of 4.75% to 5%. It was the ninth rate increase in a year, but marked a step down from the half- and three-quarter-point increases implemented during much of 2022. Speaking after the conclusion of the Federal Open Market Committee (FOMC)’s two-day meeting, Fed Chair Jerome Powell said inflation remains “too high,” but added that the Fed no longer anticipates that “ongoing” rate increases would be needed. While such language represents a less-aggressive rhetorical posture than the central bank has taken recently, the chair also suggested “some additional policy firming may be needed.”

Alex Coffey, senior trading strategist at TD Ameritrade, said recent turmoil in the banking industry has effectively tightened credit conditions, possibly making further rate increases by the Fed unnecessary. Still, the Fed had to send a message that it’s not making an abrupt shift in its efforts to bring inflation down.

The Fed has been in “cruise control” raising rates, “staying in the fast lane,” Alex said. “Now, it has turned off cruise and maybe changed lanes, but isn’t doing a quick move toward the off ramp. Today’s increase was not a ‘dovish’ hike, but also not the hawkish stance that was feared.”

“We’re near the end of the tightening cycle,” he added. “But they have to do this slowly.”

The Fed commentary appeared to briefly soothe the market, causing the S&P 500® index (SPX) to rise as much as 1% soon after the central bank’s announcement, but the benchmark changed direction in the last hour of trading. The reversal may have in part been in response to the ambiguity of Powell’s words, as well as continuing concern about a potential recession.

The following is a round-up of today’s market activity:

• The SPX is down 65.90 (1.7%) at 3,936.97.
• The Dow Jones Industrial Average® ($DJI) is down 530.49 (1.6%%) at 32,030.11.
• The Nasdaq Composite® ($COMP) is down 190.15 (1.6%) at 11,669.96.
• The 10-year Treasury note yield (TNX) is down about 17 basis points at 3.44%.
• The Cboe Volatility Index® (VIX) is up 0.88 at 22.26.

In his press conference, Powell suggested the Fed is uncertain about how much tightening in credit conditions will result from the banking problems. “Consequently, the Fed is leaving the door open on softening its pace and magnitude of tightening,” stated a note from the Schwab Center for Financial Research.

“The Fed is trying to thread the needle between concerns about the banking system and current inflation,” according to the note. “We continue to believe that the banking problems will lead to slower economic growth as financial conditions tighten. However, it’s too soon for the Fed to measure that, so it’s leaving the door open to changing its views.”

“The Fed is also trying to emphasize that it is using other tools to address the need for liquidity in the financial system while continuing to tighten via policy rates.”

Looking ahead

With the Fed meeting concluded, the market’s focus is likely to shift to the banking industry and the economy.

Thursday will bring a couple more indicators on the housing market, including the Census Bureau’s New Home Sales report for February. Analysts expect sales to have declined about 4.5% from January to a seasonally adjusted 640,000, according to Trading Economics. The New Home Sales data will follow the release Tuesday of a report showing Existing Home Sales rose a surprisingly strong 14.5% in February from the month before, though sales were still nearly 23% lower than the same month in 2022, in a possible reflection of the sharp rise in interest rates over the past year.

Also Thursday, the Labor Department will report weekly initial jobless claims, which may draw heightened interest after Amazon AMZN, in a note to employees from CEO Andy Jassy, said it would cut 9,000 jobs. However, tech layoffs have seemingly not been reflected in claims data so far this year. Analysts expect new claims of 197,000, according to Trading Economics. Anything above 200,000 might be viewed by the market as slightly positive, perhaps a sign of the job market tightening and pushing down inflation.

Nike NKE shares fell more than 3% even as the company’s quarterly results, released Tuesday, topped Wall Street forecasts, with earnings of $0.79 per share, about $0.25 above expectations. Revenue jumped 14% to $12.4 billion, also above expectations. The decline likely reflected concern over excess inventories tied to supply chain disruptions, reports said.

Earnings expected Thursday include Accenture (ACN), Darden Restaurants (DRI), and General Mills (GIS). DRI may be worth watching, as casual dining restaurants have flashed recession signals earlier than other business sectors. 

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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