Bank Stocks Investors Don't Believe the Federal Reserve

The Federal Reserve opted to raise interest rates by a quarter-point Wednesday afternoon in its ongoing fight against inflation, marking the Federal Reserve bank's 10^th consecutive rate hike amid concerns the persistent increases could threaten the nation's regional banks.

If anyone shared those concerns, it wasn't Federal Reserve Board Chairman Jerome Powell, who said in remarks Wednesday afternoon he believed the U.S. banking system was "sound and resilient," and could weather the shift, even the target range for the federal funds—5.00 to 5.25 percent—reached their highest levels since 2007.

The move was an effort to maintain confidence in the market while still taking the steps they've deemed necessary to cool the economy and avoid a potential recession. Investors—particularly in the nation's regional banking sector—weren't buying it.

Mere days after one of the sector's worst trading days in history, regional banks saw their stock prices collapse even further after hours Wednesday, even after claims by Federal Reserve Chair Jerome Powell he would consider easing rate hikes in the future.

PacWest Bancorp—which some fear was on the verge of collapse—was down 60 percentage points in after-hours trading, an all-time low for the company. Western Alliance Bank, another regional bank, was down 30 percent, with the Financial Times reporting early Thursday morning the bank had begun exploring "strategic options" that included a potential sale of all or part of its business.

Metropolitan Bank, meanwhile, tanked 20 percent, one of several other companies to see a double-digit percentage drop in share price overnight.

Representatives with the Federal Reserve Board declined comment.

Critics took it as a clear sign of pessimism from the markets as the Fed seeks to avert a looming recession, sparking new concerns about a banking sector collapse that began with the fallout of major players like Silicon Valley Bank and First Republic.

Both of the lightly-regulated financial institutions collapsed after their high levels of uninsured deposits—and highly publicized moves by a number of vulture capitalists to spark fear about the companies' futures on the internet—led to a series of bank runs by accountholders earlier this year that forced the government to intervene.

After comments by Treasury Secretary Janet Yellen earlier this year suggesting that the bailouts those banks received would potentially not be reciprocated for smaller firms amid a larger collapse, many investors have begun an exodus from small regional banks they now perceive as risky investments.

"Investors have every right to be concerned," Morris Pearl, chair of the activist group Patriotic Millionaires and former managing director of BlackRock, told Newsweek in an email. "While the FDIC is doing its job to bailing depositors—it is not bailing out shareholders of banks like PacWest or Western Alliance. The Fed is in a quandary: they are trying to slow down the economy to fight inflation, which slows down the payback of loans, and makes loans and securities and investments less valuable. This would end up causing more regional bank fallout."

In this month alone, approximately $78 billion in market value has been wiped out from the banking industry in the last month, while many accountholders, fearing collapse, have moved their funds to larger firms some believe are more able to weather a looming fiscal storm.

While stocks fell across the board following the Federal Reserve's Wednesday announcement, major firms like JP Morgan and Wells Fargo saw relatively paltry dips in their share price, with many already beginning to recuperate their share prices throughout Thursday morning. While companies like PacWest began to see recovery entering the afternoon, share prices were still down 50 percentage points from their apex on Wednesday.

Whether the trend persists is a lingering question. While some analysts believed that other bank failures could be looming in the coming months, Morningstar analyst David Sekura told Reuters Thursday morning he believed the markets were likely overreacting to short-term pressures being applied to regional banks in the U.S., pushing valuations well below where they should be.

"We do think things are going to stabilize," he said. "But it probably won't be until the end of this year or the beginning of next.

The Fed seems to be of a similar mind.

While Powell said Wednesday that support for another rate hike at the board's next meeting was "very strong across the board," he said there was a sense that "we're getting close or maybe even there," suggesting a pause at the board's next meeting June is possible.

As for a cut in rates before the end of the year?

"Not in our forecast," Powell said Wednesday.