May 5, 2023 – Fed rate hike; market reaction; banking sector performance

Welcome to the May 5, 2023, issue of Business News Digest by Simple Finance and Economics. The highlights of this issue: Fed raises rates, while Treasury yields drop, and regional bank stocks are under pressured.

Fed rate hike

The Federal Reserve increased its benchmark interest rate target by a quarter of a percentage point, marking the 10th consecutive rate hike since March 2022. This brings the fed-funds rate to a target range of 5.0% to 5.25%, the highest level since 2007. Fed Chairman Jerome Powell hinted that this could be the last rate hike of this cycle, depending on future economic data. The Fed’s aggressive rate-raising cycle has been aimed at curbing inflation.

Market reaction

Market participants were disappointed with the Fed’s announcement and press conference, seeking a more definitive signal on whether further rate hikes were off the table or how long a pause might last. The Treasury market, particularly at the front end of the curve, anticipated a rate cut in the future. The two-year Treasury yield experienced its biggest one-day decline in yield since March 27, while the 10-year Treasury’s yield declined modestly.

Banking sector performance

The banking sector, particularly regional banks, faced pressure due to fears that continuing Fed rate hikes would hurt the value of banks’ portfolios and raise their deposit costs. The KBW Nasdaq Regional Banking index initially rallied, but fell following the Fed’s announcement and press conference. Despite the Fed stating that the U.S. banking system is “sound and resilient,” individual banks such as PacWest Bancorp, First Horizon, and Western Alliance Bancorp experienced significant declines in their stock prices.

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