U.S. stocks fell on Wednesday as Fed chair Jerome Powell reaffirmed the central bank's commitment to slowing down rate hikes to fight inflation.
In line with expectations, the Federal Reserve increased interest rates by 25 basis points. In its latest policy statement, it did not mention that ongoing rate hikes were necessary, causing some investors to interpret the omission as a possible indication that rates could be reaching their peak.
As a result, Treasury yields dropped to session lows after the statement's release. The two-year note's yield fell to 3.9597 percent from 4.177 percent, while the 10-year note's yield also decreased to 3.4509 percent from 3.606 percent.
Powell said that the Fed would take sufficient measures to bring the inflation rate down to two percent. However, he also indicated that the Fed might continue to increase rates if required.
This hawkish tone negatively impacted the U.S. stock market, with the Dow Jones Industrial Average falling 1.63 percent, the S&P 500 dropping 1.64 percent and the Nasdaq Composite Index declining 1.6 percent.
Economist Michael Gapen of Bank of America said that the Fed could increase its rates beyond May if the financial system's stress levels begin to decrease. However, he maintained that the central bank could end its rate-hiking cycle earlier than expected.
Over the last two weeks, the failure of Silicon Valley Bank and Signature Bank in the U.S. and the emergency sale of Credit Suisse caused chaos in global markets.
Regulators and policymakers worldwide have taken measures to mitigate the impact on the banking sector and prevent a decline in equity markets. However, despite these efforts, many investors remain concerned that the tightening credit markets may lead to the collapse of smaller lenders in the future.
Persistent price pressures
Despite the Federal Reserve's months of interest rate hikes, price pressures have not subsided, leading the Fed to suggest that it may pause its policy-tightening cycle.
In addition, recent data revealed that U.K. inflation unexpectedly increased to 10.4 percent in February, creating speculation that the Bank of England may implement a quarter-point rate hike during their Thursday meeting.
European bonds also have been impacted by recent market events. Germany's two-year yields recorded the biggest daily surge since 2008 as markets adjusted expectations for more European Central Bank (ECB) hikes.
The euro gained against the greenback, reaching a near seven-week high at $1.0940, while the sterling rose by up to 0.5 percent to $1.2274 following the release of British inflation data. As the dollar index softened, with a 0.62 percent decrease following the Fed's cautious stance, the yen rose to 131.39.
The dollar's weakened state also helped lift oil prices on Wednesday, with Brent crude settling at $76.69 a barrel after a $1.37 or 1.8 percent increase, while U.S. crude closed at $70.90, $1.23 or 1.8 percent higher.
Banking sector turmoil
Unnerved by the recent developments in stock markets, investors remained vigilant about the signs of stress in other areas of the economy.
Luke Ellis, CEO of Man Group, said many banks in the U.S. and Britain would fail within the next two years due to the upheaval caused by the failure of Silicon Valley Bank.
First Republic faces further scrutiny as its attempts to secure a capital infusion were unsuccessful on Tuesday. Following Treasury Secretary Janet Yellen's statement that there is no discussion to insure all deposits, the bank's stock dropped by 15.5 percent on Wednesday.
Gold, which has served as a safe-haven investment amid the banking crisis, saw a surge in value after the Fed hinted at pausing its tightening cycle. The metal tends to perform well in low-interest-rate environments. As such, spot gold prices rose 1.41 percent to $1,967.53 an ounce.