Markets slide after latest Fed rate hike

The hope on Wall Street is that this is the latest hike after the Fed’s fastest wave in decades. The central bank nodded to the possibility in its statement, where it dropped a reference saying it “anticipates that some additional policy tightening may be appropriate.

That’s a meaningful change, said Fed Chairman Jerome Powell.

But the Fed stopped short of ending rate hikes, which have already opened cracks in the US banking system, sent stock prices well below their all-time highs and led many investors to expect a recession later this year.

Powell also said that while traders are hoping for interest rate cuts later this year, which could act like steroids for markets, he doesn’t expect them to happen any time soon. The next Fed meeting is next month.

So instead of sounding like a hawk, as Wall Street calls policymakers who want higher interest rates, or a dove who favors lower interest rates, Powell may have come across as something in between.

He really seemed to jump from hawkish straight to not gentle, but chicken so far: They don’t know what’s going to happen, said Brian Jacobsen, chief economist at Annex Wealth Management. They want to keep the option to cut, they want to keep the option to walk, and they want to keep the option to hold. They want to have everything at their disposal because they really have no idea how things will turn out.

What Jacobsen said could also put a damper on the market was Powell’s repeated references to a soon-to-be-released study that will reveal how many credit officials at banks say they are tightening credit standards.

The banking system has felt the brunt of all the Fed’s fate hikes, and three of the four largest US bank failures in history have occurred in the past two months. The concern is that the turmoil in the sector may prompt banks to withdraw their lending. That could only work if interest rate hikes would further suffocate the economy.

The Fed is in a tricky position, however, as inflation remains well above the Fed’s 2% target, and it’s still hurting households trying to keep up. Lower-income households are especially under pressure.

Powell said he still has hope that the economy can avoid a recession, but he acknowledged that we always have to weigh the risk of not doing enough and not getting inflation under control, and perhaps the risk of slowing down economic activity too much .

After the collapse of Silicon Valley Bank, Signature Bank and First Republic Bank, investors have continued to look for other potential weak links in the banking system. The toughest checks focused on small and medium-sized banks that could see a sudden exodus of customers.

Shares of PacWest Bancorp, Western Alliance Bancorp and other rivals fell again following the Fed’s decision, a day after trading in their shares was halted amid steep declines. PacWest fell 2% after rising earlier in the day. Western Alliance was down 4.4%.

On the other side was Eli Lilly, which rose 6.7% after reporting encouraging results from a study of a treatment for Alzheimer’s disease. Kraft Heinz rose 2% after beating analyst forecasts for profit and revenue.

Most companies are making better profits than previously feared. But expectations for this reporting season were low given the effects of much higher interest rates and a slowing economy. S&P 500 companies are likely still on track to report a second consecutive quarter of earnings declines.

That’s why a lot of attention has been paid to what companies say about emerging trends.

Advanced Micro Devices fell 9.2% despite stronger-than-expected earnings and sales. It gave a forecast for current quarter revenue that fell short of some analysts’ expectations.

Reports on Wednesday offered potentially encouraging data on the US economy. One of them suggested that the labor market may be in better shape than expected. ADP said hiring at private employers has moved much faster than expected over the past month. It could raise expectations for the federal government’s more comprehensive report on hiring due Friday.

The labor market has recently been one of the strongest pillars supporting the economy, although some mixed data has recently suggested it may be weakening. On the one hand, the Fed sees that as useful in pushing inflation closer to its target. On the other hand, a decline would greatly increase the risk of a recession.

In the bond market, the yield on the 10-year Treasury fell from 3.44% at the end of Tuesday to 3.36%. It helps set rates for mortgages and other important loans.

The two-year interest rate, which moves more than expected for the Fed, fell from 3.99% to 3.88%.

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AP Business Writers Elaine Kurtenbach and Matt Ott contributed.