NEW YORK: Wall Street stocks fell on Wednesday as the US Federal Reserve raised rates again to combat inflation, warning that the financial sector’s unrest might have an impact on the overall economy.
The decline followed a relief bounce earlier this week and occurred after European markets made modest gains ahead of the US central bank’s rate announcement.
When financial authorities took action to stop a banking sector contagion in the wake of the failure of three US regional institutions this month, stocks had increased.
Yet, all eyes were focused on the Fed as it announced an anticipated quarter-point rate hike, its ninth consecutive increase in an effort to counter persistent price hikes.
Pressure on central banks to end their monetary tightening programme has been increasing as a result of tensions in the banking industry that have been attributed to sharp increases in borrowing costs over the past year.
Recent changes in the banking industry, according to a statement from the Fed, are expected to result in “tighter lending conditions for consumers and companies.”
The central bank added that they will slow down economic activity as well.
The S&P 500 lost 1.7 percent, while the tech-heavy Nasdaq and the Dow also finished lower by 1.6 percent.
US Treasury Secretary Janet Yellen’s remarks to a Senate subcommittee on Wednesday that the country was not considering a wide increase in deposit insurance added to the unease.
Equities originally rose on the belief that the Fed has stopped rising interest rates, according to Edward Moya, senior market analyst at Oanda.
Investors were alarmed by Yellen’s remarks on deposit insurance, he continued, “but the banking turbulence won’t be subsiding anytime soon.”
The Fed’s quarter-point rise equaled the level of its previous move in February and was in line with expectations.
Rate reductions “are not in our base scenario,” said Fed Chair Jerome Powell, adding that in the wake of Silicon Valley Bank’s quick demise, the Fed must increase supervision and regulation of banks (SVB).
According to Peter Cardillo of Spartan Capital, “Anytime you propose more regulation, it’s definitely a negative in terms of stocks.”
After the rate decision, Stephen Innes of SPI Asset Management stated that “the Fed was ultimately in a no-win situation.”
Innes wrote in a note that stopping the rate increases might have caused market jitters that the problems in the banking sector were more serious than first appeared, leading to a “worse outcome.”
Just days after struggling Swiss banking giant Credit Suisse was absorbed by UBS, London, Paris, and Frankfurt barely managed to finish in the black.
According to National Australia Bank analyst Rodrigo Catril, up to the Fed’s statement, assurances and stability measures from the government appeared to be having a “enduring beneficial effect.”
Yellen had reaffirmed her support for ailing lenders in the largest economy on Tuesday.
This went further than the government’s efforts to reassure depositors following the failure of SVB and Signature Bank, as well as the Fed’s and other major central banks’ initiatives to increase lenders’ access to liquidity.
Christine Lagarde, president of the European Central Bank, said on Wednesday that the current financial turmoil could increase “downside risks” in the eurozone, but she made no commitments regarding more interest rate increases there.
