The much-anticipated Federal Open Market Committee meeting's interest-rate decision produced a very choppy session that ended with a sharp drop into the close. Small caps were hit with a loss of over 2.7%, regional banks dropped over 5.5%, and the S&P 500 took a hit of around 1.6%.
Stocks jumped sharply on the initial news of a unanimous agreement to raise rates by a quarter-percentage point, as anticipated, but there were several intraday swings before the drop at the close, as Fed Chair Jerome Powell addressed various issues.
Let's dive into some of the key points from the day:
1. Inflation is still too high, and "additional policy firming may be appropriate" to bring it down to the 2% target
2. The banking crisis has had the impact of an interest rate hike and allows the Fed to be less aggressive with monetary policy.
3. Disinflation is continuing in goods, but the Fed still needs more data related to housing and employment.
4. The Fed policy statement signaled it would likely have few hikes when it dropped the phrase "ongoing hikes" that was used in the last eight statements.
5. The banking crisis makes a "soft landing" less likely, but Powell believes there is still a path there.
6. Powell says that, "participants don't see rate cuts this year," but the market doesn't believe this and is pricing in two or three cuts.
What hurt the market more than anything from the Fed was that right after Powell made a comment that "depositors should assume their deposits are safe," Janet Yellen said that the "Treasury is not considering or working on a unilateral expansion of deposit insurance." That came as a surprise to the market and caused the acceleration of selling into the finish.
Technically, the ugly selling closed the gap on the S&P 500 chart that was created on Tuesday morning, but there is still some support at the 200-day simple moving average. The big issue going forward is whether the bulls will be able to shrug off these worries and concerns again or will the bearish narrative be able to gain further traction?
There is much information for the market to sort out now, and worries about banks are increasing after the Yellen comments. The bulls have confounded the economic bears recently, but the action Wednesday proves that the bears still have some potent ammunition.
Have a good evening. I'll see you tomorrow.
