Investors have been praying for central banks to stop raising interest rates for some time, but the strongest possible hint yet from the Federal Reserve that it will stop increasing the cost of borrowing doesn’t seem enough to put them in a good mood.
The Fed’s 0.25 percentage point hike last night was widely expected, so that won’t have been the cause of putting markets in a bad mood. However, the central bank did send signals that it may pause further increases in rates against uncertainties regarding the state of the economy and the banking sector.
Russ Mould, investment director at AJ Bell, says: “So why didn’t stock markets rally? Many investors thought falling inflation would be the principal reason why the Fed would pivot. That’s not the case now. Under the current circumstances, the Fed is more likely to pause rate hikes because the US faces the prospect of a recession and in light of more banks struggling. Therefore, not a reason to celebrate.
“The state of the banking sector is the one to watch as that has been the key worry point for markets this year. Just as we thought the crisis was past its worst, PacWest shares tumbled yesterday, raising the prospect that it might be the next US bank to seek a buyer or raise new capital. This news is enough to have put a chill on the markets.
“Stocks with notable US exposure were among the biggest fallers on the FTSE 100, including Pearson, Ashtead, Experian and JD Sports. Likewise, on the FTSE 250, one of the biggest fallers was 4imprint which is mainly a US business. These movements suggest investors might be reassessing the outlook for the US, perhaps changing their expectation for a recession from a shallow one to something more serious.”