Stocks are jittery as Wall Street weighs the Fed’s future moves

Stocks rose Thursday afternoon, after a second day of volatility in which the S&P 500 swung between gains and losses.

The index rose 0.3 percent by the end of the day. It earlier rose more than 1.7 percent, but gave up that gain before rising again.

The big swings this week came as investors grappled with the impact of rapid Fed interest rate increases on the banking system. On Wednesday, the Federal Reserve raised interest rates by a quarter of a percentage point, continuing its campaign to rein in inflation. This is the ninth increase in borrowing costs in a year.

But the Fed also acknowledged that it may be near the end of its rate-raising cycle, and that turmoil in the banking system, triggered by the collapse of the Silicon Valley bank earlier this month, could prompt it to pause. If banks cut back on lending as a result of the turmoil in the financial system, making it difficult for consumers to borrow and spend, it could curb inflation by slowing the economy.

Investors remain concerned about the health of the banking system. The jump in interest rates over the past year has decimated the value of the Silicon Valley bank’s investment portfolio, which started a run for deposits as the bank’s clients feared it might fail. When it did indeed collapse, it raised fears that other banks might capitulate as well, particularly smaller lenders with less diversified deposit bases.

The shaky balance sheets of banks is one reason many investors are betting that the Fed will stop raising interest rates, and perhaps start lowering them later this year. This is despite statements to the contrary by policy makers, who say the battle against stubbornly high inflation is far from over.

“Markets have, for now, no confidence in the Federal Reserve’s ability to independently address inflation and financial stability,” ING analysts wrote in a note to clients Thursday. “This is unlikely to change soon.”

Although concern about smaller banks has certainly eased somewhat in recent days, Thursday’s trading showed that investors were still uncomfortable: Backwest Bank, Zions Bancorp and First Republic Bank were all lower.

The central banks of Britain, Norway and Switzerland on Thursday also raised interest rates. The quarter-point increase by the Bank of England was the 11th consecutive move higher, and policymakers said the country’s banking system was able to withstand a period of higher interest rates.

Shares in London fell after the decision, with the FTSE 100 down about half a percent.