Don't expect the Fed to cut interest rates this year despite the tightening of credit conditions due to the failure of several U.S. regional banks, Powell said. Associated Press
Investors finally got their wish, hearing the "dovish" rate hike they had been waiting for. But why did the Dow Jones Industrial Average drop more than 500 points after the Federal Reserve (Fed) raised interest rates by 1 yard (0.25 percentage points) and predicted that it would only raise interest rates once more?
It is also puzzling that the US dollar and US bond yields are still falling sharply after Fed Chairman Powell warned not to expect interest rate cuts this year?
Based on the opinions of several market strategists, the reason for the sharp drop in US stocks is that Powell left investors with a lot of uncertainty at the press conference, which is worrying; at the same time, it was also affected by Treasury Secretary Yellen's speech.
On the one hand, Powell emphasized that the credit crunch has worsened, which hurts the economy and the labor market and makes it harder for the Fed to work, but on the other hand it does help curb inflation.
Why did the U.S. stock market plummet?
While Powell assured the public that the U.S. banking sector is well-capitalized and "sound," Treasury Secretary Janet Yellen told a Senate committee that "comprehensive" deposit protection had not been considered or discussed, sending U.S. stocks lower.
In the second half of Powell's press conference, Yellen also spoke at the same time. The S&P 500 fell, then rose, back into flat territory, and then plummeted again. Investors thought Powell would advocate expanding depositor protections if economic stress mounts, but Yellen soon dashed those hopes.
It is rare for two such heavyweights to speak at the same time, and it is even worse when the two send messages that are interpreted as opposing.
Yellen's comments disappointed investors after media reports that regulators were looking at expanding guarantees to all depositors if concerns over the collapse of Silicon Valley Bank (SVB) grow.
Investors were taken aback by Yellen and Powell sending conflicting messages on bank deposits at the same time. Associated Press
"It's amazing that Yellen and Powell are sending conflicting messages about bank deposits at the same time," said Steve Chiavarone, fund manager at Federated Hermes. I was right, I thought they would coordinate."
At the same time, it is reasonable to say that the end point of the Fed’s interest rate hike has not been raised or even lowered, which should be beneficial to the stock market, but when this expectation turns into doubts about a serious economic downturn, the situation is more complicated.
Why did bond yields and the dollar also plummet?
U.S. 2-year Treasury yields fell 19 basis points to 3.97%. U.S. 10-year Treasury yields fell 10.4 basis points to 3.5072%. The U.S. dollar index (DXY), which measures the U.S. dollar against six major currencies, fell 0.9% to 102.346, falling for five consecutive days and reaching its lowest point since February 2.
Don't expect the Fed to cut interest rates this year despite the tightening of credit conditions due to the failure of several U.S. regional banks, Powell said.
“The question for us is how big of an impact will this have?” he said, expressing misgivings about tightening credit conditions that could hurt families and the economy. But he also reiterated: "A rate cut is not our base case."
Steve Sosnick, chief market strategist at Interactive Brokers, pointed out that while Powell has ruled out a rate cut before the end of 2023, fed funds futures and public yields are pricing in as many as three rate cuts this year.
"The recent expectation of a rate cut has been good for stocks, but now, investors should be careful if they come true," Sosnick said. "Most scenarios where rates get to that level are not good for stocks."
Daleep Singh, chief global economic researcher at PGIM Fixed Income, also commented: "Our expectation remains that today's rate hike may be the last of the cycle and that the hangover from the current banking turmoil will force the Fed to implement a 50- 75 basis point rate cut."
Singh's main concern is that without clear support, the pressure on mid-sized banks remains high.
In addition, the U.S. 10-year Treasury yield has fallen to 3.5%, from as high as 4.2% in October last year. Kathy Jones, a strategist at Schwat Center for Financial Research, believes that this indicates that the market expects a future economic slowdown and weaker inflation. Unlike the 2-year yield, which is sensitive to policy rates, the 10-year yield is more reflective of views on the longer-term outlook for the economy.
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