July 13, 2024

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Equity investors are trading cautiously ahead of the Fed’s interest rate decision

Equity investors are trading cautiously ahead of the Fed’s interest rate decision

Stocks fell on Wall Street late Wednesday, after swinging between gains and losses earlier as investors sought to balance the Federal Reserve’s decision to raise interest rates by a quarter of a percentage point, while acknowledging that stress in the banking sector would Also restrict the economy.

The S&P 500 rose sharply shortly after the decision was announced, before eventually falling 1.65% on the day. Trading was muted in the morning, as investors awaited the Fed’s decision.

The Fed’s job on Wednesday was a tough one; To remain tough on the stubborn inflation that is driving up household prices across America, while also addressing the recent stress in the banking system caused in part by the rapid increase in interest rates intended to address rising prices.

At first, it seemed that the central bank had threaded the needle and stock prices rose with the announcement of its decision. But as trading continued, and Federal Reserve Chairman Jerome H. Powell answered reporters’ questions, the rally subsided, with some investors left unhappy that the central bank chief had done enough to allay concerns about the lingering fallout from the bank’s collapse in recent weeks.

“This is the Fed making the same policy mistake it has done routinely in its history,” said Don Calcany, chief investment officer at Mercer Advisors Wealth Management. “I think the Fed is slow to respond to significant pressures in the banking system.”

In the bond market, the two-year Treasury yield, which is sensitive to changes in interest rates, fell sharply to below 4 per cent, as bets mounted that Wednesday’s rate hike was likely to be the last.

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The Fed raised interest rates to constrain the economy and slow inflation. This was part of the reason why the crisis in the banking sector has flared up in recent weeks, and now the stress of the financial system itself could put more pressure on the economy, negating some of the Fed’s need to continue raising interest rates.

“This is seen as either the recent rally or close to the recent rally,” said George Goncalves, head of US macro strategy at MUFG Securities. “They were going to be really aggressive about inflation, but the banking crisis hit them.”

After suffering a series of bank meltdowns that prompted regulators’ intervention around the world and generated wild swings in financial markets, investors, analysts and economists were left guessing as to what the Fed might do on Wednesday – the uncertainty reflected in loss-making trading. the last two weeks.

Typically, the Fed likes to set investors’ expectations, leading them to the likely outcome of interest rate decisions, while limiting any possible market fallout from a sudden move. But Mr. Powell’s latest public comments came just days before regulators took control of the Silicon Valley bank, with the Fed chief testifying to Congress that he was open to raising interest rates more quickly in response to data that showed inflation entrenched in the economy.

With the economic backdrop shifting sharply since Mr. Powell’s comment, investors have been left in the dark about what the central bank will do – stick to previous plans, or adapt to the new set of circumstances.

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After a bout of banking turmoil that reverberated around the world, many are beginning to think that the Fed could instead leave interest rates unchanged.

PacWest Bank, the Los Angeles lender that has come under pressure along with other regional banks, said it tapped into emergency cash after a 20 percent drop in its deposits since the start of the year.

The announcement sent PacWest’s share price down, down 17 percent for the day, and sent other regional banks’ share prices down as well. It explained the turbulent back moves that preceded the Federal Reserve’s decision to raise interest rates.

“I think the Fed is not reacting,” Kalkani said. “I think there is more stress in the financial system than the Fed thinks.”