Dow up over 300 points, stocks rally to session highs in final hour of trade as bank tensions ease and Fed decision looms

U.S. stocks finished sharply higher on Tuesday as anxiety about the banking sector receded after U.S. Treasury Secretary Janet Yellen’s reassurances on containing the banking crisis buoyed market sentiment.

All three major stock indexes booked back-to-back gains ahead of Wednesday’s Federal Reserve interest-rate decision.

How stocks traded
  • The S&P 500

    climbed 51.30 points, or 1.3%, to finish at 4,002.87.

  • The Dow Jones Industrial Average

    was up 316.02 points, or 1%, to end at 32,560.60.

  • The Nasdaq Composite

    gained 184.57 points, or 1.6%, ending at 11,860.11.

What drove markets

Yellen vowed on Tuesday that there would be more U.S. support for small bank depositors if needed, but she also told an industry group that “the situation is stabilizing” after recent moves by the government. Reports that the U.S. Treasury is considering boosting the guarantees on bank deposits was also helping the mood.

Increased investor optimism about the banking system after the rescue takeover of Credit Suisse

by its long-term rival UBS

also helped lift U.S. regional stocks. Shares of First Republic Bank

rallied 29.5%, after losing 47% in the previous session. Shares of the SPDR S&P Regional Banking ETF
 which covers the regional banks segment of the broader S&P 500 index, jumped 5.8% and booked its largest daily percentage increase since January 2021, according to Dow Jones Market Data.

See: First Republic stock rallies after bank backstop pledge from Treasury’s Yellen and reports of push to raise capital by JPMorgan

Easing tensions in the financial sector makes it more likely the Federal Reserve will raise its policy interest rate again on Wednesday. The fast-moving banking crisis was suddenly setting up a clash for the Fed between banking sector stability and price stability while inflation sticks around.

Read:The Fed will either pause or hike interest rates by 25 basis points. What are the pros and cons of each approach?

Many Fed watchers in the market think a 25-basis-point increase is the likely outcome. There’s an 83% chance of a 25-basis-point increase to the federal-funds rate when the Fed wraps its two-day policy meeting on Wednesday, according to CME Group’s FedWatch Tool.

“The Fed can take a cautious approach here, and an ultra cautious approach would be to not hike at all and simply wait to see what’s going to happen,” said Thierry Wizman, a global FX and rates strategist at Macquarie.

“It’s important to keep in mind that this [banking] crisis comes at a time when unemployment is very low in the U.S., and we’re at least on a backward looking basis, referring to coincident indicators like CPI [which shows] inflation is still high. And this is why this decision probably calls for some sort of compromise result, which is to do 25 basis points instead of zero,” Wizman told MarketWatch on Tuesday.

See: Fed likely to follow ECB’s playbook and hike interest rates this week

But there’s still many who think the Fed will stand pat for now despite the brightening mood surrounding regional banks and Yellen’s remarks that regulators are ready to do what’s needed to shore up the financial system. That includes Peter Cardillo, chief market economist at Spartan Capital Securities.

“Does that cure the present banking turmoil? I don’t think so,” Cardillo said. “I think the Fed can pause and revisit what inflation looks like in two months,” he said.

After this week’s meeting, the central bank’s next Federal Open Market Committee meeting is scheduled for May 2-3.

Also see: Fund managers fear a ‘systemic credit event’ as the biggest threat to markets: Bank of America

Others think markets may not be out the woods, amid higher interest rates and tighter lending conditions.

Roughly a third of 212 fund managers polled by Bank of America said a “systemic credit event” is the biggest threat, while 25% said persistent inflation is the market’s most pressing problem.

In U.S. economic data, existing home sales in February made their biggest leap since July 2020, according to Tuesday morning data. Last month, sales climbed 14.5% to 4.58 million, beating expectations of 4.2 million in sales. Housing stocks are trading higher after the data release.

Companies in focus

— Jamie Chisholm contributed to this article