What happened
Shares of several fintech stocks lost ground today, along with the broader market, after Federal Reserve Chairman Jerome Powell indicated the Fed will stay hawkish until it sees further proof that inflation is coming down.
Shares of the digital bank SoFi Technologies (SOFI -0.28%) fell roughly 7.6% today, while shares of artificial intelligence lender Upstart Holdings (UPST -1.97%) fell 10.3%, and shares of the large mortgage originator Rocket Companies (RKT 1.30%) ended the day down nearly 10.8%.
So what
The market waited all week for Powell to take the floor at the Fed's annual Jackson Hole Economic Symposium, looking for clarity on where the Fed might be headed with future interest rate hikes.
Image source: Getty Images.
Powell indicated that he did not think the Fed's work in reining in inflation was done yet, and that the Fed would keep raising rates until there is further evidence that inflation has peaked and is coming down. He added that the Fed's fight against inflation will not come without consequences.
"While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses," Powell said this morning. "These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain."
Higher interest rates and economic pain are not good news for SoFi, Upstart, or Rocket. While SoFi is a bank and therefore does benefit from higher interest rates, too much inflation or a more severe recession can stunt loan growth and increase loan defaults.
Upstart's stock has been hammered this year as higher interest rates have dried up the capital markets, which the company needs to purchase loans and fund loan growth. Rocket has seen closed origination volume and its margins hit hard as higher interest rates have dried up refinancing activity, although housing values have started to come down for the first time in a long time.
Despite the news today, SoFi did get some good news this week when President Joe Biden announced $10,000 of forgiveness for borrowers with an outstanding federal student loan, as well as income under $125,000.
Additionally, Biden extended the student loan moratorium for the seventh time since the pandemic started, pausing federal student loan payments until the end of the year, but also saying this is the last extension. The news finally gives SoFi and student loan borrowers the clarity they need to make a decision about refinancing and is likely to get SoFi's student loan refinancing business, which has struggled since the pandemic started, back on track.
Now what
I am a little surprised to see the market reacting so harshly today, considering that I think it was unlikely for Powell to turn dovish. But perhaps investors are worried about a more serious recession or are trying to read between the lines and think that Powell doesn't think inflation is softening yet.
I'm hopeful that new inflation data early in September will further confirm that inflation has peaked and is coming down. But for now, there are still the Fed's previous rate hikes working their way through the economy, with more to come. I think these will continue to weigh on Upstart and Rocket's businesses.
I'm much more bullish on SoFi. The company benefits from rising rates, serves a very affluent customer that should be more resilient in a severe recession, and should see its student refinancing business, which used to be its largest lending product, bounce back at long last.
