The Dow Jones Industrial Average lost 530.49 points on Wednesday, falling by 1.63% to close at 32,030.11. The other indices fell by similar margins: the S&P 500 fell by 65.90 points to close at 3,936.97, and the Nasdaq Composite fell by 190.15 points to end at 11,669.96.
After its Wednesday meeting, the Federal Reserve's Open Market Committee decided to modestly increase interest rates by 25 base points, bringing the Effective Federal Funds Rate to 5%. In its commentary on the coming economic period, the FOMC expressed worries the financial situation was not as stable as some officials had tried to make it seem.
“Financial conditions seem to have tightened, and probably by more than the traditional indexes say. ... The question for us though is how significant will that be - what will be the extent of it, and what will be the duration of it,” Federal Reserve chairman Jerome Powell told reporters.
“We’ll be looking to see how serious is this and does it look like it’s going to be sustained. And if it is, it could easily have a significant macroeconomic effect, and we would factor that into our policy decisions."
However, he reaffirmed that the banking system as “sound and resilient.”
US fiscal policy is caught between a rock and a hard place: the Fed has steadily raised interest rates over the last year in an attempt to slow down depreciation of the US dollar's value, but that same move has reduced the yields of bonds and made investors shy about taking on new loans.
Confusion about bond values helped trigger the collapse of the Silicon Valley Bank earlier this month, the second-largest bank failure in US history, which sent ripples through the global financial system. Sovereign Bank soon buckled as well, and Credit Suisse in Switzerland required state intervention to remain stable.
In the US, First Republic Bank and PacWest have seen significant flight of depositors in recent days - a sign that confidence in the banking system may not return soon.