Stock Market Crash Alert: Will a 25 BPS Fed Rate Hike Tank Stocks?

  • Today’s rate hike could yield major stock market action.
  • If you recall, in December stocks fell on hawkish comments from Fed Chair Jerome Powell.
  • Looking ahead, narratives are mixed. Some expect Powell to continue pushing hawkish sentiments, while others believe a dovish pivot could be coming.
fed rate hike - Stock Market Crash Alert: Will a 25 BPS Fed Rate Hike Tank Stocks?

Wednesday’s Federal Open Market Committee (FOMC) meeting represents a major turning point for both the U.S. economy and, by extension, the stock market. Will the Fed rate hike prompt a stock market crash?

For better or worse, the resounding sentiment to come from the FOMC meeting will likely be in the hands of Fed Chair Jerome Powell. Indeed in past rate hike decisions, Powell has largely dominated the resulting stock market action. From sunny messages of “transitory inflation” to longings for a “soft landing,” to staunch warnings of “some pain” ahead, Powell hasn’t always been consistent in the tone or content of his speeches. In that regard, it remains unclear what to expect from Powell on Wednesday.

As it stands, stocks are in a state of limbo, awaiting the Fed’s all-important rate hike announcement. Indeed the central bank is expected to raise rates an additional 25 basis points, a notable slowdown from the 75 and 50 basis-point hikes it opted for in 2022. This leaves equity markets in a sort of suspended animation, waiting to confirm the magnitude of the hike, as well as Powell’s accompanying sentiments.

If you recall, in December while stocks initially sunk after Powell’s relatively hawkish post-rate-hike remarks, they ended the week up a bit, as is common in FOMC weeks.

“Restoring price stability will likely require maintaining a restrictive policy stance for some time,” Powell said following the rate-hike decision.

As expected, stocks felt an immediate sell-off in the hours following Powell’s comments. What can we expect today?

What Will the Fed Rate Hike Mean for Stocks?

At this point, the markets have priced in a 25-basis point rate hike. Indeed Powell’s previous comments on the matter, combined with general expectations for the federal funds rate to hit 5%, means it’s unlikely the rate hike alone will prompt any major movement in the stock market.

With that said, some investors have outlined expectations of a softening Fed going forward this year, something Powell could very well snub on Wednesday. Especially if the central bank plans on moving forward with its March rate hike, something most analysts currently expect, it’s unlikely for Powell to take a particularly dovish stance.

Tom Graff, Head of Investments at Facet Wealth believes Powell will need to keep any dovish agenda under wraps on Wednesday in order to keep public perception at bay.

“If the Fed is considering not hiking in March, Powell will not explicitly telegraph such a thing…Rather he will cite the lagged effects of policy, saying that even without further rate hikes there will be an increasing tightening effect on the economy. He’ll suggest that they may or may not need to hike in March, and it all depends on the data.”

Some have likened the Fed’s current relationship with the stock market to a financial “game of chicken.” Some investors not only refuse to believe the Fed will follow through with its 5% benchmark rate goal but maintain the central bank will cut rates sooner or later in the face of a potentially ugly economic downturn.

Notions of a dovish Fed pivot have circulated for some time. While not necessarily the prevailing narrative in the stock market or otherwise, Powell has the power to likely nip much of this uncertainty in the bud. This would likely yield a far more notable stock market reaction than neutral commentary.

On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

With degrees in economics and journalism, Shrey Dua leverages his ample experience in media and reporting to contribute well-informed articles covering everything from financial regulation and the electric vehicle industry to the housing market and monetary policy. Shrey’s articles have featured in the likes of Morning Brew, Real Clear Markets, the Downline Podcast, and more.

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