Wall Street recovers as Fed officials calm bank fears

NEW YORK: Wall Street bounced back from an earlier sell-off on Friday at the end of a tumultuous week as US Federal Reserve officials calmed investor skittishness over a potential liquidity crisis in the banking sector.

While all three major US stock indexes started the session sharply lower on the heels of a sell-off among European banks, those losses reversed by early afternoon, repeating the intraday roller coaster ride of recent sessions.

The S&P 500 and the Dow were last modestly higher, while the Nasdaq remained in negative territory.

At the conclusion of a tumultuous week, marked by a Fed interest rate hike and mounting worries over the health of the banking system, all three are on course to post weekly gains.

“The last several weeks have included additional volatility due to the change in the path of monetary policy and concerns around financial stability,” said Bill Northy, senior investment director at US Bank Wealth Management in Helena, Montana.

“Looking at the broad market, the major impact has been the shift in monetary policy,” Northy added. “In terms of the differential between expectations of policy and the what the fed laid out indicates that there’s a reconciliation to occur in the coming months.” In separate appearances, three regional Fed bank presidents said that their confidence that the banking system was not facing a liquidity crisis is what led to the decision to implement a 25 basis point policy rate hike on Wednesday.

But while Fed officials continue to see additional rate hikes as a strong possibility, financial markets are now pricing in an 87% likelihood of a no hike at all at the conclusion of its next policy meeting in May.

Worries over potential contagion beyond regional banks to threatens to spread to their larger peers was sparked by a sell-off of European bank shares.

That selloff was prompted by the rising cost of insuring Deutsche Bank’s debt, expressed by its credit default swaps, coming on the heels of the state-sponsored buyout of Credit Suisse, has fed into the narrative of sector-wide stress.