U.S. stocks face downside risk after the Federal Reserve went ahead with an interest-rate hike Wednesday to battle high inflation after bank failures earlier this month, according to SoFi’s Liz Young.
“I still think that something is probably going to keep breaking,” said Young, head of investment strategy at SoFi, in a phone interview. “I think we’re setting up for probably a correction here.”
The Fed announced Wednesday that it decided to raise its benchmark rate by a quarter of a percentage point, as the “U.S. banking system is sound and resilient” while the central bank “remains highly attentive to inflation risks.” The Fed has rapidly hiked rates over the past year to a target range that’s now at 4.75% to 5%, from near zero last March.
“It’s obvious that rate hikes have taken us into a little bit more of a dire situation,” said Young. “We’ve seen now a couple things break and they’ve hiked more.”
Shares of regional banks have tumbled this month, with investors worried about stress in the banking system following the March 10 collapse of California’s Silicon Valley Bank. The failure of Signature Bank in New York followed on March 12. That same day the Fed announced the creation of its Bank Term Funding Program to help banks meet the needs of all their depositors.
“Serious difficulties at a small number of banks have emerged” in the past two weeks, said Fed Chair Jerome Powell, during his press conference Wednesday. The Fed, working with the Treasury Department and Federal Deposit Insurance Corp., “took decisive actions to protect the U.S. economy and to strengthen public confidence in our banking system,” he said.
Meanwhile, recent developments in the banking sector “are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring and inflation,” according to the Fed’s statement.
Powell reiterated during the press conference that the Fed is committed to bringing still-high inflation down to its 2% goal. “Without price stability, the economy does not work for anyone,” he said.
Considering the Fed’s aggressive rate-hiking campaign over the past year to tame hot inflation, Young said “I find it very hard to believe that we get out of that unscathed, especially with some of the warning signs we now have.” For example, she cited the inverted yield curve in the Treasury market, which historically has preceded a recession, as well as “something more real like a banking crisis that seems to be averted for now,” and concerns over commercial real estate.
The Fed’s “dot-plot” forecast, released Wednesday, showed potentially just one more rate hike this year, with no rate cuts projected. “Rate cuts are not in our base case,” Powell said at the press conference.
U.S. stocks ended sharply lower Wednesday, with the Dow Jones Industrial Average DJIA,
Read: Fed hikes interest rates again, pencils in just one more rate rise this year