MANHATTAN (CN) — Conflicting testimony by federal officials made for choppy sessions on Wall Street this week, muddying what might otherwise have been a prime opportunity for investors to claw back losses.
By the closing bell on Friday, the Dow Jones Industrial Average — which at one point had nearly wiped out last week’s losses — gained only 377 points for the week, and the S&P 500 and Nasdaq increased by 55 points and 193 points, respectively.
The Fed’s announcement Tuesday of just a 0.25 interest rate hike, as well as calming comments by Jerome Powell, the central bank’s chair, worked together to mollify investors. Powell spoke in press conference after the hike about the resilience of the U.S. banking system ans said the central bank is “prepared to use all of our tools to keep it safe and sound.”
In juxtaposition to this, however, Treasury Secretary Janet Yellen offered uneven testimony on whether banking deposits would be protected if the banking crisis expanded.
Investors took comfort Thursday in Yellen’s comments before the House banking committee that the federal government was “prepared to take additional actions if warranted” to make depositors at beleaguered banks whole. “We have used important tools to act quickly to prevent contagion,” Yellen testified. “And they are tools we could use again.”
This came after Yellen spooked Wall Street a day earlier by telling a Senate committee she had not considered “anything having to do with blanket insurance or guarantees of all [banking] deposits.”
While Yellen’s seemingly divergent comments on were not mutually exclusive, they also caused markets jitters. “Playing whack-a-mole works just fine for now, but Yellen’s comments are hardly reassuring for investors,” James Vogt at Tower Bridge Advisors wrote, highlighting the discord not only between Yellen's own comments but their divergence from Powell's as well. “Markets want confidence and known facts," Vogt said. "These two mixed up their message.”
Vogt also noted that Powell essentially viewed the banking crisis as “an equivalent to rate increases” but that markets will remain tight. “A mini-banking crisis adds fuel to the deflationary fire,” he wrote, adding that “I sense a recession is now a foregone conclusion either this year or next.”
According to the Fed’s latest economic projections, unemployment is likely to hit 4.5% by the end of the year. The current unemployment rate is at 3.5%, and initial claims show the current job market remains tight. In nine of the 10 last weeks, jobless claims have been under 200,000, which some experts say shows the imbalance between workers and job openings.
The Fed also projects inflation will not hit its coveted 2% rate until 2025, with most members of the central bank believing inflation will finish 2023 at 3.3%.
As a result of the projections, the Fed may in fact begin cutting rates. According to the so-called “dot plot” released this week by the Fed, which shows how members of the Federal Open Markets Committee plan on voting on future interest rates, the Fed may raise rates one more time by 0.25%.
Also according to the dot plot, however, most members of the FOMC believe the federal funds rate will be slashed in 2024 around 4% and continue falling to around 3% by 2025. The current federal funds rate is at 4.75% to 5%, the highest it has been since the beginning of the Great Recession.
“The Fed will need to wait at least another few weeks for clearer evidence of the impact from the recent banking sector turmoil, but we expect economic weakness will convince officials to move to their sidelines before long,” Andrew Hunter, deputy chief U.S. economist at Capital Economics, wrote in an investor’s note on Friday.
Despite some of the warning signs for the banking sector and economy in general, things bode well on Wall Street, where predictions abound of large increases in U.S. indices.
One analysis by FactSet says the S&P 500 will see a 17% price increase over the next year. The energy sector is projected to see the largest increase, and the information technology sector is expected to see the smallest. Even the banking sector, which has seen a 0.8% decline since the end of February, is projected to see a 27% increase to closing prices, FactSet noted.
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