More tumult in US economy as Fed meets

The US economy was hit with more jarring economic news on Tuesday as regional bank stocks tumbled along with job openings, and the focus shifted to the Federal Reserve, which is expected to raise interest rates again when it concludes its two-day meeting on Wednesday.

The Fed is facing criticism over the current banking crisis for waiting too long to increase rates to address rising inflation.

"By missing the boat on inflation in 2021, the Fed was forced to raise rates aggressively throughout 2022. That's ushered in significant deposit flight in 2023, hurting the smallest banks as deposits fled to money-market funds and larger banks," wrote Edward Harrison on Bloomberg.com on Tuesday. "Concentrating risks in more highly regulated institutions certainly makes the Fed's job easier."

He was referring to financial giant JPMorgan Chase & Co winning an auction over the weekend for First Republic Bank in San Francisco.

"Fed are in real precarious position, each time they raise rates the regional banks in USA are going to come under pressure, you can't have interest rates at over 5% and deposit interest rates at sub 1%," tweeted Pat Phelan, CEO of Sisu Clinic in Ireland.

"Raising interest rates while only protecting the largest banks puts regional banks into receivership and ensures only 'too big to fail' banks survive," tweeted entrepreneur Will Madden. "The Fed has all but stopped issuing new accounts to startup banks. Why do their actions clearly support a US banking oligopoly?"

US job openings fell for a third straight month in March, and layoffs increased to the highest level in more than two years, suggesting some softening in the labor market that could aid the Fed's fight against inflation.

Still, the labor market remains tight, with a monthly Labor Department report on Tuesday showing 1.6 vacancies for every unemployed person in March.

Fed officials are closely watching that ratio, which remains above the 1.0-1.2 range that economists say is consistent with a jobs market that is not inflationary.

The US central bank is expected to raise its benchmark overnight interest rate by another 25 basis points to the 5 percent-5.25 percent range on Wednesday before potentially pausing its fastest monetary policy-tightening campaign since the 1980s.

"The decline in the ratio of job vacancies to unemployment in the last three months represents a reduction in the excess demand for labor that will be welcomed by the Fed," said Conrad DeQuadros, senior economic adviser at Brean Capital in New York.

"However, with the ratio still higher than at any time prior to November 2021, the labor market is still tight by historical standards."

"The job openings and quits rates remain historically high, and the layoff rate remains historically low, but all three are moving in the direction of a cooler labor market," said Michael Feroli, chief US economist at JPMorgan in New York.

"The signs of labor market softness won't be a game-changer for tomorrow's Fed meeting, though they do suggest that the cumulative amount of policy tightening is starting to have its desired effect on businesses' labor demand," he said.

Job openings were down 384,000 to 9.59 million on the last day of March, the lowest level since April 2021.

Stocks closed lower Tuesday as investors focused on a warning by Treasury Secretary Janet Yellen that the federal government could run out of money within a month amid a political standoff to raise its $31.4 trillion borrowing cap.

The Dow Jones Industrial Average fell 367.17 points, or 1.08 percent to 33,684.53; the S&P 500 lost 48.29 points, or 1.16 percent, to 4,119.58; and the Nasdaq Composite dropped 132.09 points, or 1.08 percent, to 12,080.51.

Energy shares dropped along with oil prices as investors worried about a potential US debt default.

The KBW regional banking index hit its lowest level intraday since late 2020.

US regional banks extended losses after the seizure and auction of First Republic Bank. Most of its assets were bought by JPMorgan Chase & Co in a deal brokered by the Federal Deposit Insurance Corporation. Two other US regional banks collapsed in March.

"If a 'confidence crisis' can happen to First Republic, it can happen to any bank in this country," said Jake Dollarhide, CEO of Longbow Asset Management.

"We may be moving into a chronic phase of the crisis," said Julian Wellesley, global banks analyst at Loomis Sayles in Boston, reported The Wall Street Journal. "It's a difficult outlook for regional banks."

Quincy Krosby, chief global strategist at LPL Financial in Charlotte, North Carolina, said: "There's more and more talk about problems with commercial real estate. Commercial real estate really is, for the most part, the province of the regional banks."

Economist Dr. Jack Rasmus tweeted that "the fundamental 'problem' now is the psychology & sentiment of depositors and investors in the regional banks. They're going to withdraw deposits no matter. No amount of FDIC guarantee & Fed re-regulation will reverse the psychology variable now driving the crisis."

Harrison wrote for Bloomberg that behemoth JPMorgan Chase getting even larger with its assumption of First Republic "will cause a lot of angst in the US simply because of the longstanding American penchant for federalism and suspicion of centralization".

"Those suspicions are what led to Glass-Steagall Act of 1933, which divided commercial banks from their investment banks," he wrote. "For a country still upset today about bailouts of so-called too big to fail institutions a decade and a half ago, that's a political problem — and specifically for the Fed."

Reuters contributed to this story.