Stocks fell on Wall Street after the head of the Federal Reserve warned it could accelerate its economical hikes to interest rates if pressure on inflation remains high.
The S&P 500 fell 62 points, or 1.5%, to 3,986 on Tuesday, and the Dow Jones Industrial Average fell 575 points, or 1.7%, to close at 32,856. Both were nearly flat just before Fed Chairman Jerome Powell says the central bank is ready to get more aggressive on rate hikes if warranted. The tech-heavy Nasdaq fell 1.3%
Treasury yields rose after Powell testified before a Senate committee. The two-year Treasury yield is near its highest level since 2007.
Inflation still too hot to handle
Inflation and what the Fed is doing about it have been at the center of Wall Street’s wild swings this year. After appearing to be steadily declining since last summer, inflation reports last month were surprisingly warm. Just like a series of other data on the economy.
This has raised fears that inflation will remain more rigid than expected and that the Fed may have to raise rates higher than previously thought. Higher rates may lower inflation because they slow the economy, but they hurt stock prices and other investments. They also increase the risk of a subsequent recession.
Its chairman, Jerome Powell, confirmed some of those fears on Tuesday and said recent data means “the ultimate level of interest rates will likely be higher than expected.” He also said in his testimony before a Senate committee that the Fed was ready to increase the pace of its hikes again if necessary.
That would be a sharp turnaround as it had just slowed its pace of increase to 0.25 percentage points last month from earlier rate hikes of 0.50 and 0.75 points.
“If all the data were to indicate that faster tightening is warranted, we would be prepared to accelerate the pace of rate hikes,” Powell said. “Restoring price stability will likely require us to maintain tight monetary policy for some time.”
After sitting at virtually unchanged levels just before Powell’s testimony, stocks fell immediately after.
“This is the market coming back to realistic expectations,” said Megan Horneman, chief investment officer at Verdence Capital Advisors. “I think that’s going to continue to take some of the excess out of the market.”
Wall Street had already convinced itself that higher-than-expected rates were on the way and that the Fed might even possibly return to bigger rate hikes after last month’s data reports.
Since receiving last month’s booming jobs report and other surprisingly strong data, Wall Street has largely abandoned hopes that had percolated earlier this year of a possible interest rate cut later. in 2023. He also raised his forecast for where the Fed will eventually take rates before pausing. .
This was clearer in the bond market, where the 10-year Treasury yield rose above 4% last week and hit its highest level since November. It helps set the rates for mortgages and other large loans.
On Tuesday, it approached 4% again after Powell’s comments before falling back to 3.97% from 3.96% on Monday evening.
The two-year Treasury yield, which moves more in line with Fed expectations, climbed to 5.01% from 4.87% and is near its highest level since 2007.
Traders expect a half-point jump
Traders now see about a two-in-three chance that the Fed will accelerate its rate hikes and hike 0.50 percentage points on March 22. by 0.25 points, according to data from CME Group.
“If they were to move to 75 after coming back to 25, that would scare the markets,” Horneman said. “I still think they will go to 25, but if they go to 50, I think that “would be seen as” the Fed is very flexible and can act quickly if necessary if the economic data tells them to.
“If they express that, I think the markets can accept that.”
More fireworks could be coming later this week and into the next as the Fed gets more data points that will surely help shape its decision-making ahead of its next interest rate meeting later this month. -this.
On Friday comes the US government’s monthly jobs report. In this context, most of the attention will be focused on raising workers’ wages. The fear at the Fed is that too big gains could lead to upward pressure on inflation.
Then, two reports next week will give updates on the high level of inflation, both at the consumer level and at the wholesale level.
Big changes, sudden moves
Big shifts among investors regarding the direction of inflation and the Fed have resulted in sharp moves for the markets. In January, stocks rallied and bond yields eased as hopes grew that inflation would subside and prompt the Fed to ease interest rates. Then last month’s torrent of strong data shattered those expectations and sent stocks tumbling and bond yields soaring.
Though they were “shaken” by Powell’s testimony, however, the markets could see another turnaround, an analyst says. “Longer-term rates fell, not rose, with the 10-year yield remaining below 4%, suggesting that longer-term markets view the Fed as doing well against inflation,” noted Brad McMillan, chief investment officer of the Commonwealth Financial Network in an email. “As equities are generally more sensitive to long rates over time, this suggests that the current sell-off may not last.”
On Wall Street on Tuesday, WW International, better known as WeightWatchers, soared after saying it was getting into the prescription weight loss business with the purchase of telehealth platform Sequence. WW shares jumped 73%.