What did Powell and Yellen say that led the markets to fall

Wall Street expectations were met still US stock market fell after Fed rate hike.

Powell, Yellen, US stock market, Federal Reserve, rate hike
Equities still seem disconnected from fundamentals, possibly placing hopes on lower real yields and a re-expanding Fed balance sheet.

The US Federal Reserve’s decision to hike interest rates by 25 basis points was no surprise for the markets. Yet, the stocks fell with leading indices ending the day’s session lower. Post-commentary conference remarks by Fed Chief Powell and the recent comment by US Treasury Secretary Janet Yellen on the safety of bank deposits may have spooked the markets.

Powell hinted at larger economic woes and expectations of a worsening credit crunch, which would ultimately do the Fed’s job for it by harming the economy and labour market while aiding in the fight against inflation. Markets may have sensed a potentially serious economic downturn.

Markets fell after the Fed Chief Powell’s press conference which left a lot of uncertainty on the table for investors to figure out the Fed’s next course of action. “As expected, the Fed announced a rate increase of 25 basis points, but Powell is convinced that, if necessary, the central bank will continue to raise the rates to fight inflation, despite the current difficulties in the banking industry,” says “Ilya Volkov, CEO and Co-Founder of YouHodler.

Although Powell gave the reassurance that US banks were adequately capitalized, leading banking indices fell almost 4.75% on March 22. “The market dumped bank shares again after US Treasury Secretary Janet Yellen told a Senate hearing that she had “not considered or discussed anything having to do with blanket insurance or guarantees of all deposits,” says Eugene Leow, Senior Rates Strategist, DBS Bank.

Peter Boockvar, chief investment officer of Bleakley Financial Group sums it up well in his tweet, “The trifecta of trouble? Powell acknowledges the credit crunch ahead, says inflation and price stability are still a big focus and that they don’t foresee cutting rates this year in response to the consequences of the former and because of the latter. No wonder why the stock market closed at the lows.”

When rates go up, so does the bond yield. But, currently, yields are falling – Here’s why: “Despite the much anticipated 25 bps rate hike, bond yields are falling suggesting a classic understanding that rates have peaked out and are set to reverse ahead. Given what Mr Bond Market is indicating, Fed may blink in the next show,” says Dhawal Ghanshyam Dhanani, Fund Manager, SAMCO MF.

“The massive action and perception divergence between global equities and the rates markets makes us uneasy. Equities still seem disconnected from fundamentals, possibly placing hopes on lower real yields and a re-expanding Fed balance sheet. We continue to see a case for tricky sacrifice ratios and financial cracks, implying mispricing by equities,” says the Emkay Global Financial Services report.

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First published on: 23-03-2023 at 15:17 IST