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US Stocks Fall, Bond Yields Tumble 03/22 16:03
Stocks fell sharply Wednesday after the Federal Reserve indicated the end
may be near for its economy-crunching hikes to interest rates, but it also
doesn't expect to cut rates anytime soon despite Wall Street's hopes.
NEW YORK (AP) -- Stocks fell sharply Wednesday after the Federal Reserve
indicated the end may be near for its economy-crunching hikes to interest
rates, but it also doesn't expect to cut rates anytime soon despite Wall
Street's hopes.
The S&P 500 fell 1.6% for its first drop in three days. The Dow Jones
Industrial Average lost 530 points, or 1.6%, while the Nasdaq composite dropped
1.6%.
Some of the sharpest drops came again from the banking industry, where
investors are worried about the possibility of customers yanking their cash to
cause more collapses. They slid after Treasury Secretary Janet Yellen said
she's not considering blanket protection for all depositors at all banks,
unless they present a risk to the overall system.
Stocks had been little changed for much of the day, before the Fed raised
its key rate by a quarter of a percentage point in its campaign to drive down
inflation. The move was exactly what Wall Street was expecting. The bigger
question was where the Fed is heading next. There, the Fed gave a hint it may
not hike rates much more as it assesses the fallout from the banking industry's
crisis.
Instead of repeating its statement that "ongoing increases will be
appropriate," the Fed said Wednesday that it now only sees "some additional
policy firming may be appropriate." Chair Jerome Powell emphasized the shift to
"may" from "will."
The Fed also released the latest set of projections from its policy makers
on where rates are heading in upcoming years. The median forecast had the
federal funds rate sitting at 5.1% at the end of this year, up only a smidge
from where it currently sits, in a range of 4.75% to 5%.
That's also the same level as seen in December, and it's counter to worries
in the market that it could rise given how stubborn high inflation has remained.
That helped to send yields slumping in the bond market, which has been home
to some of the wildest action this month.
The yield on the two-year Treasury, which tends to track expectations for
the Fed, tumbled to 3.96% from 4.13% just before the projections were released.
It was above 5% earlier this month.
Some of this month's slide also came from building hopes for rate cuts later
this year by the Fed. Such cuts can boost prices for stocks, bonds and other
investments while giving the economy more room to breathe. They also, though,
can give inflation more fuel.
Powell said Wednesday the Fed is still focused on getting inflation down to
its 2% goal and that it is not envisioning any rate cuts this year. He also
said the Fed could begin raising rates again, even after it takes a pause, if
high inflation makes that necessary. That took some momentum out of the market.
Economic "indicators are still pretty resilient," said Sameer Samana, senior
global market strategist for Wells Fargo Investment Institute. "For markets to
still speculate on rate cuts, it's probably not going to take place this year
if the Fed has its way."
"There were a good dozen or so instances where he kept bringing it back to
inflation. For better or worse, he was pretty consistent."
The Fed was stuck with a difficult decision as it balanced whether to keep
hiking rates to drive down inflation or ease off the increases given the pain
it's already caused for the banking industry, which could drag down the rest of
the economy. The second- and third-largest U.S. bank failures in history have
both occurred in the last two weeks.
A worry is that too much pressure on the banking system, particularly among
the smaller and mid-sized banks at the center of investors' crosshairs, would
mean fewer loans made to businesses across the country. That in turn could mean
less hiring and less economic activity, raising the risk of a recession that
many economists already see as high.
Powell said such a pullback in lending could act almost like a rate hike on
its own. And that was one of the reasons the Fed opted to raise by only 0.25
points Wednesday instead of 0.50 points. He also said that he sees the banking
system overall as strong and sound.
Markets around the world have pinballed sharply this month on worries the
banking system may be cracking under the pressure of much higher rates. They
found some strength recently after Yellen indicated on Tuesday the government
may back depositors at more weakened banks if the system is at risk.
That could mean making sure even customers with more than the $250,000 limit
insured by the Federal Deposit Insurance Corp. can get all their money. On
Wednesday, though, Yellen said that she wasn't considering blanket protections
for all depositors at all banks, only for those "when it's deemed to be a
systemic risk."
Stocks of smaller- and mid-sized banks fell sharply. First Republic Bank
dropped 15.5%, and PacWest Bancorp. fell 17.1%.
Some of the biggest excitement was around what are called "meme stocks."
GameStop shot up 35.2% after it reported a surprise profit for its latest
quarter. Analysts were expecting another loss for the struggling video-game
retailer.
The stock rocked Wall Street in early 2021 when hordes of smaller-pocketed
and novice investors piled into it, sending its price surging and inflicting
big losses on hedge funds that had bet on its decline.
All told, the S&P 500 fell 65.90 points to 3,936.97. The Dow dropped 530.49
to 32,030.11, and the Nasdaq fell 190.15 to 11,669.96.
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