ASX falls as Fed and Yellen comments rattle Wall Street

“I have not considered or discussed anything having to do with blanket insurance or guarantees of deposits,” Yellen said during a hearing before a Senate subcommittee, answering a question about whether the protections would be provided to all US deposits.

“It’s astounding that Yellen and Powell would have given contradictory messages on bank deposits at the same time,” said Steve Chiavarone, senior portfolio manager and head of multi-asset solutions at Federated Hermes. “Powell essentially said that all deposits are safe, Yellen said, ‘Hold my beer.’ You would have thought that they would have coordinated.”

Concerns about the safety of deposits “saw bank stocks retreat quite heavily,” said Commsec equities analyst Tom Piotrowski.

Yet some argued that Powell’s insistence that the Fed doesn’t see rate cuts this year and was prepared to lift rates higher than expected if it sees the need to do so also helped push stocks lower.

The Fed raised its key overnight rate by a quarter of a percentage point, the same size as its last increase, in its campaign to drive down inflation. The move was exactly what Wall Street has been expecting. The bigger question was where the Fed is heading next. There, the Fed gave a hint it may not hike rates much more as it assesses the fallout from the crisis hitting the banking industry.

The Fed also released the latest set of projections from its policymakers on where rates are heading in upcoming years. The median forecast had the federal funds rate sitting at 5.1 per cent at the end of this year, up only a smidge from where it currently sits, in a range of 4.75 per cent to 5 per cent.

That’s the same level as seen in December, and it’s counter to worries in the market that it could rise given how stubborn high inflation has remained. That helped to send yields slumping in the bond market, which has been home to some of the wildest action this month.

The yield on the two-year Treasury, which tends to track expectations for the Fed, tumbled to 3.99 per cent from 4.13 per cent just before the projections were released. It was above 5 per cent earlier this week, and a drop that size for the bond market is a massive one.

The yield on the 10-year Treasury, which helps set rates for mortgages and other important loans, fell to 3.49 per cent from 3.61 per cent late Tuesday.

The Fed was stuck with a difficult decision as it balanced whether to keep hiking rates to drive down inflation or ease off the increases given the pain it’s already caused for the banking industry, which could drag down the rest of the economy. The second- and third-largest US bank failures in history have both occurred in the past two weeks.

A worry is that too much pressure on the banking system, particularly among the smaller and mid-sized banks at the centre of investors’ crosshairs, would mean fewer loans to companies across the country. That in turn could mean less hiring and less economic activity, raising the risk of a recession that many economists already see as high.

Powell said that such a pullback in lending could act almost like a rate hike on its own. And that was one of the reasons the Fed opted to raise by only 0.25 points instead of 0.50 points. He also said that he sees the banking system overall as strong and sound.

GameStop shot up 37.8 per cent after it reported a surprise profit for its latest quarter. Analysts were expecting another loss for the struggling video-game retailer.

The stock rocked Wall Street in early 2021 when hordes of smaller-pocketed and novice investors piled into it, sending its price surging and inflicting big losses on hedge funds that had bet on its decline.

with Bloomberg, AP

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