U.S. bank stocks fell sharply but then recovered after the Fed said it would raise its target rate by 75 basis points for the third time this year, bringing it to a range of 3% to 3.25%.

The KBW Nasdaq Bank Index fell by approximately 0.9%, minutes after the Fed's announcement, then recovered into positive territory before trending into negative territory around market close. The index closed down 2.12% on Sept. 21 while the S&P 500 finished the day down 1.71%.

At a press conference, Federal Reserve Chairman Jerome Powell reiterated the importance of raising rates to reduce inflation.

"We anticipate that ongoing increases will be appropriate," Powell said. "We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2%. In addition, we are continuing the process of significantly reducing the size of our balance sheet."

Bank of America Corp. closed down 2.99%, and Wells Fargo & Co. closed down about 2.63%.

The consumer price index, or CPI, the market's preferred inflation metric, jumped 8.3% from August 2021 to August 2022, the Bureau of Labor Statistics reported Sept. 13. Economists had forecast an increase of 8%, according to Econoday. The increase was largely fueled by rising costs for shelter and food, although prices climbed across the economy.

Expectations for a smaller increase in inflation were largely driven by the recent decline in gasoline prices, which fell 12.2% from July to August. Gasoline makes up only about 4% of the total weight of the CPI. Shelter, which makes up about 33%, increased 6.2% from August 2021 to August 2022.

The KBW Nasdaq Bank Index dropped 4.9% from Sept. 12, the day before the CPI report, through the close on Sept. 20. The S&P 500 fell 6.2% over the same period.