Wall Street advances on back of Fed decision

Stocks have swung higher and Treasury yields are falling after the Federal Reserve announced its latest increase to interest rates in its campaign to drive down inflation.

The S&P 500 was 0.2 per cent higher in afternoon trade. The Dow and the Nasdaq also rose. Indexes had been little changed through the morning ahead of the Fed’s decision. The Fed raised its key overnight rate by a quarter of a percentage point, the same size as its last hike. The Fed gave a hint that it may not tighten the screws much more on the economy.

The Australian sharemarket is set to edge higher, with futures at 5.23am AEDT pointing to a gain of 1 point at the open.

A few weeks ago, much of Wall Street was convinced the Fed would pick up the pace on rate hikes given how stubbornly high inflation has remained. The bet was for the Fed to raise rates by 0.50 percentage points Wednesday, up from its prior hike of 0.25 points.

Higher rates can undercut inflation by slowing the economy. But they raise the risk of a recession later on, and they also hurt prices for stocks and other investments. That latter factor was one of the reasons for the collapse of Silicon Valley Bank two weeks ago. Its bond investments fell in price as the Fed jacked up rates over the last year at the fastest pace in decades.

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Silicon Valley Bank also suffered from what’s called a bank run, where its customers began pulling money out at the same time in a debilitating cascade. Since then, investors have been hunting for what bank may be next to fall, and regulators around the world have been trying to strengthen confidence in the industry.

A worry is that too much pressure on the banking system, particularly among the smaller and mid-sized banks at the centre of investors’ crosshairs, would mean fewer loans to companies across the country. That in turn could mean less hiring and less economic activity, raising the risk of a recession that many economists already see as high.

Last week, the European Central Bank pushed through a hefty hike to its key rate, despite speculation that it may ratchet back given all the banking woes.