U.S. bank stocks rallied and then took a dive on Wednesday after the Federal Reserve raised interest rates by 75 basis points for the fourth consecutive time this year amid continued efforts to break inflation.
Bank shares and the broader markets at first shot up on the rate hike announcement, which included a new passage noting that policymakers would take into account the fact that monetary policy works with a lag when determining the pace of future increases.
The KBW Nasdaq Bank Index rose on Nov. 2 after the Fed announced it would raise its target rate to a range of 3.75% to 4%. The broader markets got a bump as well.
However, the day's gains turned into losses during Fed Chair Jerome Powell's 2:30 p.m. ET press conference, with the KBW Nasdaq Bank Index closing 1.97% down and the S&P 500 closing 2.5% down. The chairman said the speed of hikes is less important as the Fed moves further into restrictive territory and that the time to slow rate increases "may come as soon as the next meeting or the one after that." But Powell continued to emphasize the risk of inflation becoming entrenched if the Fed fails to tighten enough, while if it overtightens, it has the tools to support the economy.
"I'm pleased that we have moved as fast as we have," Powell said. "It is very premature to be thinking about pausing."
"In our view, the bar for another 75 bps rate hike at the December 14 meeting is fairly high," Wells Fargo analyst Jay Bryson said in a note following the press conference. "Today's events strengthen our conviction that the Committee will deliver a 50 bps rate hike in December."
As for the economic outlook, in light of sustained and aggressive rate hikes, the window for a "soft landing" has tightened because inflation has not yet come down to a sufficient extent, but it is still possible, Powell said.
The consumer price index, the market's preferred inflation metric, rose 8.2% from September 2021 to September 2022, the Bureau of Labor Statistics reported Oct. 13. This beat economists' forecasts and reinforced expectations that the Fed would proceed with aggressive rate hikes to cool the economy, including at its next meeting in December.
Treasury yields have risen across the curve since the Fed's last rate hike in September, reflecting expectations for higher rates for longer.
Bank stocks continue to be under pressure over fears that rate hikes will negatively impact credit quality, with some banks hedge more on credit ahead of a potential recession. Rate increases have fueled a surge in net interest income, but some banks have projected that margins could top out in the next few periods as pressure on funding costs intensifies.
All but five of the 20 biggest publicly traded banks continued to show negative total returns for the year as of Nov. 1. Cullen/Frost Bankers Inc., M&T Bank Corp., Huntington Bancshares Inc., Regions Financial Corp. and First Horizon Corp. all bucked the broader trend, posting positive returns.
