Stocks, bond yields fall as Fed, with eye on inflation, signals pause
NEW YORK, March 22 (Reuters) - U.S. stocks fell from near two-week highs on Wednesday after Federal Reserve Chair Jerome Powell re-stated his commitment to curb inflation even as the Fed signaled it might soon pause future interest rate hikes amid recent turmoil in financial markets.
As expected by many investors, the Fed raised interest rates by 25 basis points, and omitted from saying in its latest policy statement that "ongoing increase" in rates will likely be appropriate.
Markets initially interpreted the omission as a sign that rates might be peaking, and drove Treasury yields to session lows after the Fed's statement was released.
However, in his press conference, Powell reiterated his desire to tame inflation by saying that the Fed will do "enough" to bring inflation down to 2%, and that it will raise rates higher if it needs to.
The hawkish note drove U.S. stocks lower. The Dow Jones Industrial Average (.DJI) fell 1.63%, the S&P 500 (.SPX) dropped 1.64%, and the Nasdaq Composite Index (.IXIC) pulled back to end down 1.6%.
"Should the stresses in the financial system be reduced in short order, we cannot rule out that stronger macro data will lead the Fed to put in additional rate hikes beyond May," said Michael Gapen, an economist at Bank of America Securities.
"But for now, we think that risks are in the direction of an earlier end to the tightening cycle."
Treasury investors appeared to agree.
The two-year yield , which falls with traders' expectations of a less hawkish Fed, fell to 3.9597% from Tuesday's close of 4.177%. The yield on benchmark 10-year Treasury notes retreated to 3.4509% from Tuesday's 3.606%.
Global markets have been thrown into chaos in the past two weeks after the sudden failures of U.S. lenders Silicon Valley Bank (SIVB.O) and Signature Bank (SBNY.O), and an emergency sale of beleaguered Swiss banking behemoth Credit Suisse (CSGN.S).
Efforts by regulators and policymakers globally to counter the convulsions in the banking sector have helped stem contagion and a rout in equity markets, though many investors fear other smaller lenders could be next in line to fail as credit markets tighten.
The Fed's signal that it might pause its policy-tightening cycle comes as price pressures remain stubborn despite months of rate rises.
Data also showed British inflation unexpectedly rose to 10.4% in February, lifting expectations for a quarter point rate hike at Thursday's Bank of England meeting, boosting sterling.
European bonds have gone along for the ride. German two-year yields overnight recorded the biggest daily jump since 2008 as markets went back to pricing in more ECB hikes.
The euro meanwhile touched a near seven-week high at $1.0940 , while sterling rose as much as 0.5% to $1.2274 after the British inflation data.
The dollar index fell on the Fed's dovish note, shedding 0.62%, and a softer dollar lifted the yen to 131.39 .
Markets, unnerved by the banking sector turmoil, remained alert to signs of stress elsewhere.
The upheaval sparked by the collapse of Silicon Valley Bank is not yet over, and a significant number of banks will fail within two years, hedge fund Man Group CEO Luke Ellis (EMG.L) said at a conference in London on Wednesday.
"I think we will have significantly more banks that don't exist in 12-24 months," Ellis said, adding that he thought smaller and regional banks in the United States and challenger banks in Britain could be at risk.
First Republic Bank (FRC.N) was also in focus after efforts to secure a capital infusion continued without success on Tuesday. The stock shed 15.5% late on Wednesday after Treasury Secretary Janet Yellen said there is no discussion to insure all deposits.
"The banking crisis is creating tighter credit conditions, and if you tighten conditions you weaken economic activity which puts more pressure on the banking sector," said Savary at Prime Partners. "I don't consider the banking crisis is over."
A softer dollar also buoyed oil prices. Brent crude rose $1.37, or 1.8%, to settle at $76.69 a barrel, while U.S. crude ended $1.23, or 1.8%, higher at $70.90.
Gold, which has benefited from safe-haven funds seeking a refuge from the banking crisis, jumped on Wednesday as some investors took note of the Fed's signal that rates might be peaking for now. Gold does well in a lower-rate environment as it yields no interest.
Spot gold prices rose 1.41% to $1,967.53 an ounce.
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