Jerome Powell flipped the text

This report is from today’s CNBC Daily Open, the new newsletter for international markets. The CNBC Daily Open updates investors everything they need to know quickly, no matter where they are. Like what do you see? You can subscribe here.

Markets were expecting the Fed to increase by a quarter point. Powell’s warnings about the economy surprised them.

• Federal Reserve officials unanimously agreed to increase interest rates. But at the post-meeting press conference, Fed Chairman Jerome Powell admitted that the committee is considering temporarily halting increases because “events in the banking system over the past two weeks are likely to lead to tougher credit conditions.”

• Asked by a senator if the Treasury Department is considering guaranteeing all bank deposits without congressional approval, Treasury Secretary Janet Yellen said it is not.

• forefront GameStop jumped 35.24% on the news that the company posted its first profitable quarter in two years. But analysts caution investors against jumping into the stock because it still faces long-term headwinds.

The past few FOMC meetings have followed a pattern. The central bank will take a hard line and raise interest rates aggressively, which will spook the markets. Hence Powell’s comments at the press conference will calm investors, who will focus on his cautious remarks (perhaps unintentional and his displeasure, I imagine).

This time, Powell flipped the script.

The markets expected a 25 basis point rally, and that’s what they got. Being right contributes to a sense of certainty, so the three major indices really rose after the Fed’s announcement. In fact, Quincy Crosby, chief global strategist at LPL Financial, noted, “Markets are responding well to an expected 25 basis point rate hike.”

Then Powell began to speak. Initially, his reassurances that “the banking system is healthy and resilient” continued to calm markets. Then Powell started talking about “tougher credit terms for households and businesses” that could “easily have a significant impact on the overall economy.” Even worse, these terms were not reflected in stock indices because they “do not necessarily capture the lending terms.” CNBC’s Patty Domme writes that this suggests the economy may be in a worse place than many thought.

As if trying to prove Powell wrong, the markets started to slide about an hour after Powell’s speech and couldn’t stop their slide. 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 fell 1.6%.

They certainly didn’t help Treasury Secretary Janet Yellen’s clarification that, contrary to how markets took her comments on Tuesday, the FDIC was not considering “universal insurance” of bank deposits – as she warned in this newsletter yesterday.

The good news is that the Fed predicted that it would raise interest rates again – perhaps another 25 basis points – before pausing. However, a cut is not on the table, if Powell is to be believed. Amidst the ongoing banking turmoil, along with the Fed’s warning about the broader economy, investors might be better off not fighting the Fed.

Participate here To have this report sent straight to your inbox each morning before the markets open.