Stocks fell sharply on Wall Street Wednesday after Federal Reserve Chief Jerome Powell signaled that it’s too early for the central bank to consider pausing its interest rate increases as it tries to crush the worst inflation in decades.
The S&P 500 fell 96 points, or 2.5%, closing at 3,760. It had been up by 1% earlier in the day. The Dow Jones Industrial Average shed 336 points, or 1.6%, at 32,148. The Nasdaq composite fell 3.6%. Before their brief afternoon rally, the indexes had all been in the red much of the day ahead of the Fed’s interest rate policy statement release at 2:00 p.m. Eastern.
Powell’s remarks came after the Fed announced a widely expected fourth straight extra-large rate increase of three-quarters of a percentage point. The market rallied briefly after the central bank released a statement that seemed to suggest it could ease back on the rate-increase program. That was welcome news for markets, which have been worried the recent pace of rate hikes could slow the economy so much that it goes into a recession.
Not so dovish
But during a press conference, Powell said that to bring inflation down, the Fed will need to keep rates high enough to hurt the economy “for some time.”
“It’s very premature, in my view, to think about or to be talking about pausing our rate hikes,” Powell said. “We have a ways to go.”
Paul Ashworth of Capital Economics suggested the Fed’s latest policy statement is less dovish than it sounds, noting that Powell emphasized in his press conference that any pause in rate hikes are a long way away.
“Although market rate expectations fell in response to the release of the statement, those declines were more than reversed during Powell’s hawkish press conference, with the peak in the fed funds rate expected to be slightly above 5.0% next summer,” Ashworth said in a report.
Long-term Treasury yields jumped after a brief pullback. The yield on the two-year Treasury, which tends to track market expectations of future Fed action, rose to 4.61% from 4.55% shortly before the Fed released its statement. The yield on the 10-year Treasury, which helps set mortgage rates, climbed to 4.09% after having fallen to 3.98% earlier in the afternoon.
The Fed’s move raised its key short-term rate to a range of 3.75% to 4%, its highest level in 15 years. It was the central bank’s sixth rate hike this year, a streak that has made mortgages and other consumer and business loans increasingly expensive and heightened the risk of a recession.
More deliberate pace
The Fed’s statement said that, in coming months, it would consider the cumulative impact of its large rate hikes on the economy. It noted that its rate hikes take time to fully affect growth and inflation.
But any encouragement that gave investors faded when Powell said during a press conference that the central bank would rather make a mistake of taking interest rates too high than easing too quickly, noting that a premature pullback on rate hikes could lead inflation to become entrenched, which risks more pain for households.
“What the Fed statement giveth, the Fed chairman taketh away,” Chris Zaccarelli, chief investment officer for independent Advisor Alliance said in a note.
“The Fed statement – especially the part that referred to ‘cumulative tightening’ – made traders very excited that a step-down or pause in rate hikes was upon us, however, the press conference took that hope away once Chairman Powell spoke about how far in the future was the timeline for them to stop their rate hikes,” Zaccarelli said.
Powell said that regardless of whether the Fed dials down its interest rate hike in December, it may still end up pulling its key short-term rate ultimately to a higher level than previously thought because of data show inflation is worse than expected.
The path ahead for the Fed is closely tied to whether inflation cools from its hottest levels in four decades. Wall Street is concerned about inflation squeezing consumers and businesses while worries grow that the Fed could bring on a recession by slowing the economy too much.
Markets racked by uncertainty
“At the end of the day, the markets like certainty and they don’t have certainty from the Fed,” said Ryan Grabinski, managing director of investment strategy at Strategas, a Baird company.
Wall Street has been closely watching the latest economic data, which is heavy on the employment market this week. The job market has remained strong despite inflation, which is being taken as a sign that the Fed will have to remain aggressive in its fight against high prices.
The latest jobs data from private payroll company ADP shows that companies added positions at a greater pace than expected in October. The report follows hotter-than-expected data from the government Tuesday on job openings.
“It’s sort of confirming that the Fed still has more work to do,” Grabinski said.
Investors will get more employment data with the government’s weekly unemployment report on Thursday and a broader monthly jobs report on Friday. They have been closely watching the latest round of company earnings to get a better sense of inflation’s impact on corporate profits and outlooks. It’s been a mixed bag so far.
The 11 sectors in the S&P 500 were in the red after shedding all their gains after the brief rally following the Fed statement. Technology stocks and retailers were among the biggest weights on the index.
Drugstore operator CVS rose 3.6% after raising its profit forecast following a strong third quarter. Casino operator Caesars Entertainment rose 2.1% after beating Wall Street’s third-quarter profit and revenue forecasts.
Short-term vacation rental marketplace Airbnb fell 10.8% after warning investors that bookings growth will slow in the fourth quarter. Beauty products maker Estee Lauder slid 6.4% after slashing its profit forecast as COVID-19 lockdowns in China and inflation hurt business.
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