Stocks climb as Wall St. Weighs the Fed’s Future Moves
Stocks on Wall Street jumped on Thursday, rebounding from a sharp decline the day before, with the S&P 500 on track for a weekly gain.
The index rose 1.5 percent by midday, with technology stocks climbing. The Nasdaq composite rose more than 2 percent.
The big swings this week have come as investors have wrestled with the impact of the Federal Reserve’s rapid interest-rate increases on the banking system. On Wednesday, the Fed raised interest rates by a quarter of a percentage point, continuing its campaign to dampen inflation. It was the ninth increase in borrowing costs in a year.
But the Fed also acknowledged that it may be near the end of its rate-raising cycle, and that turmoil in the banking system, set off by the collapse of Silicon Valley Bank earlier this month, could push it to pause. If banks pull back on lending as a result of turbulence in the financial system, making it harder for consumers to borrow and spend, that could dampen inflation by slowing the economy.
Investors remain worried about the health of the banking system. The jump in rates over the past year pummeled the value of Silicon Valley Bank’s investment portfolio, which started a run on deposits as the bank’s customers feared it could fail. When it did collapse, that raised fears that other banks might also succumb, particularly smaller lenders with less diversified deposit bases.
The shakiness of bank balance sheets is one reason many investors are betting that the Fed will stop raising rates, and may even start cutting them later this year, which is reflected in plunging yields of government bonds in recent weeks. That is despite statements to the contrary by policymakers, who say that the fight against stubbornly high inflation is not finished.
“Markets are, so far, not trusting the Fed’s ability to treat inflation and financial stability independently,” analysts at ING wrote in a note to clients on Thursday. “This looks unlikely to change soon.”
Although the concern over small banks has certainly eased somewhat in recent days, trading on Thursday showed that investors are still uneasy: PacWest Bank, Zions Bancorp and First Republic Bank were all lower.
On Thursday, central banks in Britain, Norway and Switzerland also raised rates. The Bank of England’s quarter-point increase was its 11th consecutive move higher, and policymakers said that the country’s banking system was able to withstand a period of higher rates.
Shares in London slipped after the decision, with the FTSE 100 down about half a percent.