Wall Street stocks slumped Wednesday as the US Federal Reserve continued hiking interest rates to fight inflation, while noting that banking sector turmoil could weigh on the economy.
The tumble came after European markets made timid gains ahead of the US central bank’s rate decision, and follows a relief rally earlier this week.
Stocks had gained after financial authorities moved to prevent contagion in the banking sector, following the collapse of three US regional lenders this month.
But all eyes were on the Fed as it unveiled an anticipated quarter-point rate hike, its ninth straight increase in an effort to combat stubborn price increases.
With tensions in the banking sector blamed on steep hikes in borrowing costs over the past year, pressure has been building on central banks to halt their monetary tightening campaign.
In a statement, the Fed said recent banking sector developments are likely to bring “tighter credit conditions for households and businesses.”
They would also bog down economic activity, the central bank added.
The Dow and tech-heavy Nasdaq both ended 1.6 percent lower, while the S&P 500 shed 1.7 percent.
Adding to jitters were comments by US Treasury Secretary Janet Yellen, who told a Senate subcommittee Wednesday that the United States was not considering a broad increase in deposit insurance.
“Stocks were initially rallying on optimism that the Fed is done with raising rates,” said Edward Moya, senior market analyst at Oanda.
“But Yellen’s comment on deposit insurance unnerved investors as the banking turmoil will not be going away anytime soon,” he added.
The Fed’s quarter-point hike was in line with expectations, and matched the size of its last increase in February.
Fed Chair Jerome Powell told a press briefing that “rate cuts are not in our base case,” adding that the Fed needs to boost supervision and regulation of banks after the swift collapse of Silicon Valley Bank (SVB).
“Anytime you put forward more regulation, it’s obviously a negative in terms of stocks,” said Peter Cardillo of Spartan Capital.
“Ultimately the Fed was in a no-win position,” said Stephen Innes of SPI Asset Management after the rate decision.
Pausing the rate hikes could have sparked market worries that there was more to the banking sector’s troubles than met the eye, prompting a “worse outcome,” Innes said in a note.
London, Paris and Frankfurt finished barely in the green, days after troubled Swiss banking giant Credit Suisse was swallowed up by UBS.
Prior to the Fed’s announcement, reassurances and stability measures provided by authorities appeared to be having an “enduring positive effect,” said National Australia Bank analyst Rodrigo Catril.
On Tuesday, Yellen had reiterated support for troubled lenders in the world’s biggest economy.
This added to authorities’ moves to reassure depositors after the downing of SVB and Signature Bank, along with efforts by the Fed and other major central banks to improve lenders’ access to liquidity.
European Central Bank chief Christine Lagarde on Wednesday said recent financial turbulence could add to “downside risks” in the eurozone, but did not commit to further interest rate hikes there.
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