Stock Investors Trade Cautiously Ahead of Fed’s Rate Decision

Typically, the Fed likes to set investors’ expectations, leading them to the likely outcome of rate decisions, limiting any potential market fallout from a surprise move.

Early in March, investors piled into bets that the Fed would raise interest rates by a half point at Wednesday’s meeting, twice the amount the central bank raised rates in February. They also predicted that there would be a full percentage point of rate increases to follow, by the middle of the year.

After the collapse of Silicon Valley Bank, which came about in part because of the effect of higher interest rates on bank balance sheets, investors tempered their bets on further rate increases, tilting toward an expectation of a quarter-point increase at Wednesday’s meeting but leaving the door open to a larger increase.

After another week of banking turmoil that reverberated around the world, many began to believe that the Fed could instead leave rates unchanged. On Wednesday morning, PacWest, a Los Angeles lender that has come under pressure alongside other regional banks, said it had tapped emergency cash following a 20 percent drop in its deposits since the start of the year.

The announcement sent PacWest’s stock price tumbling, down 10 percent for the day, dragging the share prices of other regional banks lower as well. The moves illustrated the tumultuous backdrop clouding investors view of the Fed’s plans for interest rates.

Article source: https://www.nytimes.com/2023/03/22/business/stock-markets-rates-fed-decision.html