The third Fed meeting is today, and that likely means the stock market is back to its old push-pull trends. That will go for all stocks, including penny stocks. On one hand, investors expecting a 25 basis point rate hike may be surprised to see it not happen. Meanwhile, on the other hand, those expecting a pause could be taken aback by yet another boost in rates.

Underpinning the recent argument for and against this rate decision is the banking crisis. What began with Silicon Valley Bank has ballooned to include 2 more failed US regional banks. It has also resulted in the implosion of regional bank stocks this year.

Banking Crisis Concerns Persist

Concerns regarding the health of these banks have come into question after the most recent, First Republic, saw its assets bought up by JPMorgan Chase earlier this week. Meanwhile, worries have accelerated heading into this next Fed rate decision. Some see it as another pressure point in an already wounded regional banking market.

The former President of the Federal Reserve Bank of Dallas, Robert Kaplan, argued against another hike.

“I’d prefer to do what’s called the hawkish pause, not raise but signal that we are in a tightening stance, because I actually think the banking situation may well be more serious than we currently understand,” Kaplan said in a Bloomberg interview.

Robert Kiyosaki Tweet Fed FOMC meeting May 2023

Others commenting on the frequent rate hikes made by the Fed have also sounded the alarm. Robert Kiyosaki, the famous author of the Rich Dad Poor Dad series, has argued against tighter monetary policy. He recently Tweeted, “WTF. What The Fed? Why is Fed destroying regional banks across America? Regional banks are heart and soul of economy. Fed via the Repo Market killing regional banks. Is this intentional? Is a depression intentional? WTF is Fed up to? Get $ out of Regionals.”

May 2023 Fed Meeting Statement & Rate Hike Announcement

Heading into the Fed Meeting today and FOMC statement for the May 2023 Fed meeting, the market is leaning toward a 25 basis point hike. However, a look at the last round of Fed minutes from March shows that some members may also expect the potential for a recession. They are also watching the baking industry closely:

“Given their assessment of the potential economic effects of the recent banking-sector developments, the staff’s projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years. Real GDP growth in 2024 was projected to remain below the staff’s estimate of potential output growth, and then GDP growth in 2025 was expected to be above that of potential.”

fed meeting fomc meeting fomc announcment fed announcement Jerome Powell

This was the first mention of the “R-word” by the Committee since declaring inflation was simply “transitory” in nature. Furthermore, there was direct mention about banking and financial conditions:

If banking and financial conditions and their effects on macroeconomic conditions were to deteriorate more than assumed in the baseline, then the risks around the baseline would be skewed to the downside for both economic activity and inflation, particularly because historical recessions related to financial market problems tend to be more severe and persistent than average recessions.”

The banking crisis was a frequent topic of the Fed’s discussion on rate decisions and potential future hikes. That may be a focus when it comes to Fed Chair Jerome Powell’s press conference on Wednesday afternoon.

The Stock Market Today

As the FOMC statement neared, broader markets were trading sideways in the stock market today. The S&P 500 (NYSE: SPY) was up less than 0.50%, and the NASDAQ (NASDAQ: QQQ) was up just 0.22%. Popular growth stocks, including Tesla (NASDAQ: TLSA) and Apple (NASDAQ: AAPL) were showing relative strength, with both up roughly 2.7% and 1%, respectively. Regional banks stocks were also showing relative strength to the company, with companies including Western Alliance Bank (NYSE: WAL), one of the more recent banks in the cross-hairs of the bears, up roughly 3.4% during the lunch our.

UPDATE

Shortly following the close of Jerome Powell’s press conference and Q&A session, markets moved sharply lower with the SPY and QQQ retesting the area around Tuesday’s lows. The Fed’s rate hike decision of 25 basis points paired with uncertainty and “data dependent” language regarding future rate hikes weighed heavier on the stock market today.

May 2023 Fed Meeting, FOMC Statement, & Interest Rate Hike Top 10 Takeaways

  1. Fed Raises Rates by 25 bps
  2. Undertake open market operations as necessary to maintain the federal funds rate in a target range of 5 to 5-1/4 percent.
  3. Conduct standing overnight repurchase agreement operations with a minimum bid rate of 5.25 percent and with an aggregate operation limit of $500 billion.
  4. The Committee is strongly committed to returning inflation to its 2 percent objective.
  5. Conduct standing overnight reverse repurchase agreement operations at an offering rate of 5.05 percent and with a per-counterparty limit of $160 billion per day.
  6. Roll over at auction the amount of principal payments from the Federal Reserve’s holdings of Treasury securities maturing in each calendar month that exceeds a cap of $60 billion per month. Redeem Treasury coupon securities up to this monthly cap and Treasury bills to the extent that coupon principal payments are less than the monthly cap.
  7. Reinvest into agency mortgage-backed securities (MBS) the amount of principal payments from the Federal Reserve’s holdings of agency debt and agency MBS received in each calendar month that exceeds a cap of $35 billion per month. oAllow modest deviations from stated amounts for reinvestments, if needed for operational reasons.
  8. Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency MBS transactions.
  9. The Board of Governors of the Federal Reserve System voted unanimously to raise the interest rate paid on reserve balances to 5.15 percent, effective May 4, 2023.
  10. The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.

Fed Chair Jerome Powell’s May 2023 FOMC Press Conference Highlights

  • As Federal Reserve Chairman Jerome Powell took the podium on May 3, 2023 investors focused on several of the most notable points mention that we will detail below:
  • Some signs that labor market is coming back into balance.
  • Inflation has moderated somewhat since last year but still runs high, and there’s a long way to go to getting back to 2% inflation.
  • The economy is likely to face further headwinds from tighter credit conditions.
  • Focus still on fighting inflation to restore price stability to achieve maximum employment and stable prices over the long run.
  • A decision on a pause was not made today and policy firming was removed from verbiage changed to observing incoming data meeting by meeting.
  • Powell expects the economy to grow versus what the staff said regarding expectations for a recession. Powell: differing perspectives is a “healthy thing.”
  • Does not see a sharp rise in unemployment like previous recession environments.
  • Regarding Debt Ceiling: it’s essential that the debt ceiling be raised in a timely way. Failure to do that would be unprecedented.


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