Banks bashed as Fed continues to raise rates

The Federal Reserve Bank raised interest again, even as another regional bank saw its stock price collapse. Investors are asking when enough tightening is enough.

The key Fed funds interest rate was hiked by another 0.25%, which increased its benchmark rate to between 5% and 5.25%. That was the 10th hike in 14 months and has pushed interest rates to a 16-year high.

The stock market sold down after Chairman Jerome Powell made it clear (again) that fighting inflation is the Fed’s number one objective. Powell did hold out some hope that this hike could be the last, although that decision, he said, would be data-dependent and be decided from meeting to meeting. Nothing he said was concrete enough for investors to truly believe that a pause in rate hikes is in the offing.

The bulls were hoping that the meeting would either result in no interest hike or be a one-and-done event.  Neither occurred, which has ramifications for the economy, employment, and the ongoing regional banking crisis. The banks lead the market declines and well they should.

Beginning in March, with the collapse of Silicon Valley Bank, the markets realized that the rapid rise in interest rates had created both a danger for many banks and an investment opportunity for the public. Main Street could now buy high-yielding U.S. Treasury bills and CDs instead of keeping their money in checking and saving accounts with little to no returns. I have written extensively on the subject in my columns over the last several weeks.

As the Fed continues to raise interest rates, the yield on these alternative investments also rises. The yield on a three-month U.S. Treasury bill, for example, rose from 5.10% to 5.25% the  day after the Fed’s interest rate hike. This has had a serious detrimental impact on banks overall and regional banks as more and more investors pull their deposits.

But that is not all. The $5.7 trillion commercial real estate sector (CRE) is also in trouble.

Thanks to high-interest rates, the pandemic, and the subsequent trend toward working from home, many urban centers are facing a historically high vacancy rate. It is so bad that many cities are considering converting empty office buildings into living spaces. This trend is spreading across the nation.

Smaller regional banks hold 4.4 times more exposure to the U.S. CRE than larger banks, according to a recent report from JPMorgan Private Bank. Citigroup also found that banks represent 54% of the overall CRE market, with small lenders holding 70% of CRE loans.

Between the drain on deposits, and now the risks in real estate, is it any wonder that the regional bank index has lost 34% of its value over the last month?

Within hours after the Fed hiked rates on Wednesday afternoon (May 3), the regional bank, PacWest, reported that it was considering strategic options including a sale. The bank’s stock tumbled 60% on Thursday and took the regional bank index and the stock market down with it.

Gold, silver, and Bitcoin (all areas I have featured in the last few months) spiked higher in a rush for safety with spot gold hitting a high of $2,085.

As I said recently, where the market would finish the week would depend on the Fed’s decision on interest rates. In hindsight, Chairman Powell had it right. The non-farm payroll data released on Friday showed that 253,000 jobs were added in April. The unemployment rate dropped to 3.4%, while the expectation was that the rate would rise to 3.6%. The Fed wants to see job gains fall, but they are going the other way.

The Fed needs to see the unemployment rate closer to 4-4.5 %% to reach its inflation target of 2%. We are nowhere near that level, so to me, the Fed’s stance on monetary policy seems vindicated.

So what does all this bearishness indicate to me? For me, I think the markets will bounce back. We may even break the range we have been in for almost a month. That is a contrarian call, since most traders are what I called “beared up.”

I believe we can still see my target on the S&P 500 Index of 4,325 give or take a few points. After that, likely in the second half of the month, I believe we will see a substantial pullback. Precious metals, on the other hand, are likely to now see a bout of profit-taking after a spectacular run.

 

Bill Schmick is a founding partner of Onota Partners Inc., in the Berkshires. None of his commentary is or should be considered investment advice.  Email him at bill@-schmicksretiredinvestor.com.

The views expressed here are not necessarily those of The Millerton News and The News does not support or oppose candidates for public office.

Latest News

Stanford home market sees nine sales in July and August

Built in 1820, 1168 Bangall Amenia Road sold for $875,000 on July 31 with the transfer recorded in August. It has a Millbrook post office and is located in the Webutuck school district.

Christine Bates

STANFORD — The Town of Stanford with nine transfers in two months reached a median price in August of $573,000 for single family homes, still below Stanford’s all-time median high in August 2024 of $640,000.

At the beginning of October there is a large inventory of single-family homes listed for sale with only six of the 18 homes listed for below the median price of $573,000 and seven above $1 million.

Keep ReadingShow less
Dutchess County Sheriff’s Report
Village of Millerton offices on Route 22
John Coston

Dutchess County Sheriff’s Office Harlem Valley area activity reportSept. 18 to Sept. 30.

Sept. 23 — Deputies responded to 1542 State Route 292 in the Town of Pawling for the report of a suspicious vehicle at that location. Investigation resulted in the arrest of Sebastian Quiroga, age 26, for aggravated unlicensed operation of a motor vehicle in the third degree. Quiroga to appear in the Town of Pawling court at a later date.

Keep ReadingShow less
Out on the trail
Nathan Miller

Hunt club members and friends gathered near Pugsley Hill at the historic Wethersfield Estate and Gardens in Amenia for the opening meet of the 2025-2026 Millbrook Hunt Club season on Saturday, Oct. 4. Foxhunters took off from Wethersfield’s hilltop gardens just after 8 a.m. for a hunting jaunt around Amenia’s countryside.

Millbrook Library dedicates pollinator pathway garden

Joining in the fun at the dedication of the new pollinator pathway garden at The Millbrook Library on Saturday, Oct. 4, local expert gardener Maryanne Snow Pitts provides information about a planting to Lorraine Mirabella of Poughkeepsie.

Leila Hawken

MILLBROOK — Participating in a patchwork of libraries that have planted pollinator pathway gardens to attract insects and birds to their native plantings was one of the accomplishments being celebrated at the dedication of a new pollinator garden at the Millbrook Library on Saturday, Oct. 4.

“A lot of work went into it,” said Emma Sweeney, past President of the Millbrook Garden Club, who started the local library’s initiative two years ago.

Keep ReadingShow less