Dow falls 500 points after Fed’s rate hike decision

Stocks experienced a sharp drop on 20 June following the Federal Reserve’s statement reaffirming its intention to keep a lid on inflation. The markets were unsettled all day, ending nervously as investors digested the Fed’s move to increase interest rates by 0.25% and looked for clues about the banking sector’s meltdown. The Fed hinted it was coming to the end of its aggressive rate-hike policy. Even so, it warned that rate cuts are unlikely this year. The Scottish economist John Kay has warned that the cessation of growth in the UK and US economies means that central banks have reached the limits of what they can achieve.

Although the markets were calmed by the hints that the hike rate would not rise again soon, regional banking stocks suffered a steep fall, leading to an overall downward drift in the indices. The financial system had just experienced the biggest bank failures since 2008, with the closure of the Spanish lender Banco Popular leading to its takeover by Santander, and Italy’s Banca Popolare di Vicenza and Veneto Banca both being shut down by the European Central Bank. However, one analyst, Scott Duba, CIO at Prime Capital Investment Advisors, suggested that the Fed’s rate increase was a clear commitment to “tame inflation”.

Meanwhile, investors were looking for safe places to deposit their cash. Gold futures and US oil benchmark West Texas Intermediate both rose, the former due to its safe haven status. Wall Street is now looking ahead to the Bank of England’s rate decision, due to be announced on 21 June. Treasury yields fell after an initial rise caused by the Federal Reserve’s rate hike.

The Dow dropped by 532 points, or 1.6%, on this uncertain trading day. The S&P 500 declined by about 1.7%, while the Nasdaq Composite fell by 1.6%. The general drift of US stocks down came despite an earlier show of strength in the European market. However, all indices were down at the end of trading.



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