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Markets had expected the Fed's quarter-point hike. Powell's warnings on the economy caught them off guard.

What you need to know today

• The U.S. Federal Reserve hiked interest rates by 0.25 percentage points, bringing it to a target range of 4.75% to 5%. But the increases might stop soon. Most Fed members kept their rate forecast for 2023 unchanged, signaling there'd be just one more hike this year before the Fed pauses.

• At the post-meeting press conference, Fed Chair Jerome Powell acknowledged "events in the banking system over the past two weeks are likely to result in tighter credit conditions." Hence, officials considered pausing hikes — but unanimously agreed to increase rates because of inflation. Speaking of which…

• Inflation in the United Kingdom reaccelerated unexpectedly. The consumer price index increased by 10.4% on an annual basis — economists had expected the number to drop to a single digit. It was also more than the 10.1% recorded in January.

• U.S. stocks tumbled Wednesday — all major indexes fell about 1.6% — after the Fed raised rates. London's FTSE 100 added 0.41% despite the U.K. recording a resurgence in inflation. European banks were marginally down at 0.2%.

• PRO GameStop surged 35.24% on the news that the company's had its first profitable quarter in two years. But analysts are warning investors not to jump into the stock because it's still facing longer-term headwinds.

The bottom line

The last few Federal Open Markets Committee meetings have followed a pattern. The central bank would take a hawkish stance and hike rates aggressively, spooking markets. Then Powell's comments at the press conference would soothe investors, who'd focus on his dovish remarks (probably unintentional and to his chagrin, I'd imagine).

This time, the script has flipped.

Markets had expected a hike of 25 basis points, and that's what they got. Being right contributes to a sense of certainty, so all three major indexes actually rose after the Fed's announcement. Indeed, Quincy Krosby, chief global strategist of LPL Financial, noted "markets are responding well to the expected 25 basis points rate hike."

Then Powell started speaking. At first, his reassurances that the "banking system is sound and resilient" continued soothing markets. Then Powell started talking about "tighter credit conditions for households and businesses" which were not reflected in stock indexes since they "don't necessarily capture lending conditions." This signaled to markets that the economy could be in a worse place than many had expected, wrote CNBC's Patti Domm.

As if trying to prove Powell wrong, markets began sliding about an hour after Powell's speech and couldn't arrest their decline. By the end of the day, the Dow Jones Industrial Average lost 1.63%, the S&P 500 fell 1.65% and the Nasdaq Composite sank 1.6%.

They were certainly not helped by Treasury Secretary Janet Yellen's clarification that, contrary to how markets took her Tuesday comments, the Federal Deposit Insurance Corporation was not considering "blanket insurance" for banking deposits — as I'd warned in this newsletter yesterday.

The good news is that the Fed forecast it will hike interest rates only one more time — probably by another 25 basis points — before pausing. A cut, however, is not on the table, if Powell is to be believed. Amid the ongoing banking turmoil, coupled with the Fed's warning about the broader economy, it might be better for investors not to fight the Fed.

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