Why did the US stock market drop at the end of yesterday's trading session?
Federica Montella | Mar 23, 2023 12:28
Wall Street went down yesterday
Wednesday has been a negative day for the US stock market.
All three major US indexes closed in a loss.
The S&P 500 finished at -1.65%, the Nasdaq ended the trading session at -1.60% and the Dow Jones closed at -1.63%.
Initially, the markets went up following the confirmation of a 25 basis points hike, but near the end of the trading session, the market changed direction after Yellen's comment about the US deposits.
The investors' sentiment is Fear, as indicated in the graph below:
Sentiment indicator - Fear & Greed Index
The market sentiment is 36, in “Fear” mode, up from last week's data in Extreme Fear.
Why did the US stock market drop at the end of yesterday's trading session?
On Wednesday, the Federal Reserve made the decision to hike the interest rate by another 25 basis points, in a unanimous vote, as expected.
That was the ninth consecutive time that the Fed hiked the interest rate, bringing the Fed Funds rate to the 4.75%-5% range, the highest since September 2007, before the financial crisis.
With the latest monetary policy action, it is clear that the Fed's priority is to reduce inflation and bringing to its 2% target, in fact, the FOMC believes that additional tightening may be necessary in order to reach that goal.
Jerome Powell attended a press conference to clarify some points, and it was very interesting what he said.
He said that the Federal Reserve's liquidity injection into the financial system demonstrates that deposits and the banking system are safe, following the recent collapse of SVB.
It is worth mentioning that Powell said the Fed is not doing Quantitative Easing at this moment even though it has expanded its balance sheet.
Mr Powell, also said, that the banking turmoil of the past two weeks, which could restrict credit access to households and businesses, will reduce inflation.
A pause in interest rate increases would have been a negative signal for the markets because the reason behind could have been a more serious problem in the financial system.
The US markets have positively responded to the latest monetary policy action and Jerome Powell's speech, but it all changed after, Janet Yellen, the Treasury Secretary said:
"We are not considering insuring all uninsured bank deposits."
That particular sentence has brought fear in the markets that have led to a selloff, especially for the banks' stocks.
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