Day Traders Diary

3/22/23

The major averages tumbled on Wednesday as the Federal Reserve continued hiking rates, while at the same time acknowledging turmoil in the banking sector could slow the already fragile economy. Regional bank shares led the slide. The Dow Jones Industrial Average fell 530 points, or 1.63%, closing at 32,030. The S&P 500 dropped 1.65% to end at 3,936. The Nasdaq Composite declined 1.6% and closed at 11,669.

Adding to the stock market's decline and the drop in regional bank shares were comments from Treasury Secretary Janet Yellen, who told the U.S. Senate appropriations subcommittee that the U.S. was not currently working on "blanket insurance" for bank deposits.

The Fed raised rates by 25 basis points, as was widely expected. In a statement, the Fed's policymaking committee said it "will closely monitor incoming information and assess the implications for monetary policy." Additionally, the central bank removed the phrase "ongoing increases" from its statement.

On the bullish side, the latest Fed projections called for just one more hike this year. But, Powell said in the news conference that the inflation fight is far from over.

"The Fed's actions today are consistent with our long-held view that the Fed will raise rates to 5.125% and pause for an extended period," Jefferies economist Thomas Simons said in a note. "Barring an increase in contagion risk within the banking sector, we expect that the Fed will be faced with a very similar policy decision in May, and they will be compelled to deliver another hike."

The Fed's rate hike comes amid uncertainty over the health of the global banking sector. Earlier this month, Silicon Valley Bank and Signature Bank collapsed, while UBS acquired rival Credit Suisse — a move forced by Swiss regulators to shore up the country's banking industry.

Regional bank shares declined on Wednesday following the rate hike announcement and Yellen's statement that the Treasury is not considering a broad increase in deposit insurance. The S&P Regional Bank ETF (KRE) ended Wednesday's trading session more than 5% lower.

Meanwhile, Powell noted that bank deposit flows had stabilized over the last week after the central bank and regulators moved to backstop depositors.

To be sure, he also said: "I think for now, though … we see the likelihood of credit tightening. We know that that can have an effect on the macro economy."