The Fed Threw a Wet Blanket + Renewed Banking Crisis Fears = Stocks Down
Despite the criticisms directed at the Fed, it has successfully managed to reduce inflation without hindering economic growth thus far. In fact, the US economy has continued to surge forward, posting a surprising 3.3% growth in Q4 2023.
The Fed has stated that it is not in a hurry to lower interest rates because inflation remains above 3%, while the target is to achieve a 2% rate. The Fed intends to observe a decrease in inflation with sustained high employment levels before considering a reduction in rates.
The Fed's tone was more hawkish this round. During the press conference, Fed Chair Powell stating, "We’re not really at that stage; there was no proposal to cut rates... We weren’t actively considering moving the federal funds rate down."
He further tempered investors' expectations for a rate cut by indicating that March is 'probably not the most likely case.'
The hawkish tone may have disheartened some investors, leading to a sell-off in the stock market following the press conference. Technology stocks, as represented by the Invesco QQQ Trust (QQQ), and small-cap stocks, represented by the iShares Russell 2000 ETF (IWM), experienced declines of 2% and more.
SPDR Dow Jones Industrial Average ETF Trust (DIA): -0.7%
SPDR S&P 500 ETF (SPY): -1.6%
Invesco QQQ Trust (QQQ): -2%
iShares Russell 2000 ETF (IWM): -2.4%
No sectors were spared in the market downturn; all eleven sectors experienced declines, with technology stocks suffering the most significant losses.
Besides the hawkish tone from the Federal Reserve, another worrying factor emerged: the potential return of last year's banking crisis.
New York Community Bancorp (NYCB), which acquired the failed Signature Bank and hired former private bankers from another failed bank, First Republic, reported a loss of $252 million, contrary to analysts' expectations of a profit.
Keep reading with a 7-day free trial
Subscribe to Finbite Insights to keep reading this post and get 7 days of free access to the full post archives.