Dow falls in choppy trade after Fed meeting delivers quarter-point rate hike despite banking system stress

What’s driving markets

U.S. stock indexes at first turned slightly higher on Wednesday afternoon after the central bank announced its decision to increase its benchmark interest rate by another 25 basis points to a range of 4.75% to 5%, the highest since October 2007.

But the market erased gains in the final hour of trade after Jerome Powell said in a press conference that there won’t be a case for rate cuts later this year contrary to what financial markets expect, while acknowledging the central bank will raise rates even higher if they “need to.”

The Summary of Economic Projections released along with the rate decision pointed to a peak rate in a range of 5%-5.25%, the same as projected back in December. It indicates only one more rate hike ahead this year.

Seven of 11 Fed officials see raising rates higher than 5.25%, with one member seeing rates go as high as 6%. No officials see rate cuts this year.

See: Fed hikes interest rates again, pencils in only one more increase

In a statement, the Fed said the banking system was sound and resilient. Officials said that the recent stress in the sector would likely lead to tighter credit conditions and reduce economic growth, but “the extent of these effects is uncertain.”

“You can call it a dovish hike,” said Kathy Jones, the managing director and chief fixed income strategist for the Schwab Center for Financial Research.

“The implication is they want to go ahead and tighten, as expected. But they are giving themselves a lot of wiggle room because the Fed is so unclear of how the tightening at banks will play out,” Jones told MarketWatch via phone.

“Despite the Fed pressing ahead with a 25bps rate hike today, we see considerable uncertainty in the path ahead and would downplay the significance of updated economic and dot plot projections in such a fast-moving environment,” said Ashish Shah, chief investment officer of Goldman Sachs’ Public Investing Business.

“Going forward, we expect the Fed’s data dependent framework to be informed by what happens in both the economy and banking sector. It is easier to separate monetary policy from financial stability objectives during liquidity crises but concerns over capital constraints can fast change the economic outlook and blur the divide. Rate cuts have become more conceivable, though not yet our base case given the inflation picture,” Shah said in emailed comments.

Companies in focus

• GameStop Corp.  shares rallied Wednesday, after the specialty retailer reported a surprise quarterly profit and sales that were above Wall Street expectations.
• Athletic-gear giant Nike Inc. shares slipped after the company said it was benefiting from the star power of both younger and older NBA athletes and enthusiasm in its running-shoe segment, but gross margins for its full-year would land at the low end of expectations.
• Shares of 89bio Inc.  soared after the company said its experimental treatment for nonalcoholic steatohepatitis (NASH) led to NASH resolution compared with placebo in a Phase 2b clinical trial. 
• Shares of First Republic Bank lost ground after news that the troubled bank reportedly has hired advisers to review its options and manage the crisis.
• Shares of Ollie’s Bargain Outlet Holdings Inc.  jumped Wednesday after the retailer of closeout merchandise and excess inventory reported better-than-expected fiscal fourth-quarter results and provided an upbeat outlook. 
• NVIDIA Corporation rose after its chief executive Jensen Huang on Tuesday laid out the company’s plans to make the supercomputers used to develop AI technologies like ChatGPT available for rent to nearly any business.

— Joy Wiltermuth and Jamie Chisholm contributed to this article