The Dow dropped 574 points as comments by Jerome Powell raised rates

Stocks sank on Tuesday after the head of the Federal Reserve Warned it may turn back the dial on its hikes in interest rates if inflation pressures remain high. The warning rattled markets and raised concerns about a possible recession down the line.

The S&P 500 fell 1.5% for one of the worst days of the year so far. the Dow The Jones Industrial Average lost 574 points, or 1.7%, while the Nasdaq The composition fell 1.2%.

Inflation and what the Fed is doing about it has been at the center of sharp changes on Wall Street this year. After seemingly a steady decline since last summer, last month’s inflation reports came in surprisingly hot. So is a suite of other economic data.

That has raised fears that inflation remains higher than feared and that the Fed may need to raise rates higher than previously thought. Higher rates drag on inflation because it slows the economy, but it also hurts the prices of stocks and other investments. They also raise the risk of a recession later.

The chair of the Fed, Jerome Powell, on Tuesday confirmed some of those fears and said that recent data means that “the final level of interest rates is likely to be higher than previously expected.” He also said in his testimony to a Senate committee that the Fed is prepared to increase the pace of its hikes if necessary.

That’s a sharp turnaround after it only slowed the pace of growth to 0.25 percentage points last month from earlier increases of 0.50 and 0.75 points.

“If the totality of the data indicates that faster tightening is necessary, we are prepared to increase the pace of rate increases,” Powell said. “Restoring price stability will likely require us to maintain a tight monetary policy stance for some time.”

After sitting at virtually unchanged levels before Powell’s testimony, stocks fell immediately afterward.

“This is the market returning to realistic expectations,” said Megan Horneman, chief investment officer at Verdence Capital Advisors. “I think it will continue to wash some excesses out of the market.”

Wall Street is beginning to convince itself that higher rates than previously thought are on the way and that the Fed may return to a larger rate hike after last month’s data reports.

Since last month’s blowout jobs report and other surprisingly strong data, Wall Street has largely abandoned hopes that floated earlier this year for a possible cut in interest rates later in 2023. It also raised its forecast for how high the Fed will eventually take rates before stopping. .

That was clearest in the bond market, where the yield on the 10-year Treasury topped 4% last week and hit its highest level since November. It helps in setting rates for mortgages and other important loans.

On Tuesday, it again approached 4% after Powell’s comments before falling back to 3.97% from 3.96% on Monday.

The two-year Treasury yield, which moved more than expectations for the Fed, shot up to 5.01% from 4.87% and was at its highest level since 2007.

Traders now see a better than two-in-three chance that the Fed will accelerate its rate hikes and raise 0.50 percentage points on March 22. That’s a flip-flop from a day earlier, when widespread bets were for the Fed to stay with a smaller increase of 0.25 points, according to data from CME group.

“If they go to 75 after retreating to 25, that will spook the markets,” Horneman said. “I still think they will go to 25, but if they go to 50, I think it will be seen as the Fed has become flexible and can act quickly if necessary if the economic data tells them that.”

“If they say that, I think the markets will accept that.”

More fireworks could come later this week and next as the Fed gets more data points that will help shape decision-making before the next meeting on interest rates.

On Friday comes the US government’s monthly jobs report. Within that, most of the attention is on how high the workers’ wages are. The Fed’s fear is that too strong gains could lead to higher inflation pressures.

Then two reports next week will provide updates on how high inflation remains at the consumer and wholesale levels.

The challenge for the market is that the economy is actually very strong, despite all the Fed rate hikes being thrown at it. While that strength has calmed concerns that a recession could hit soon, it likely means rates should stay higher. That in turn raises the risk of a deeper recession down the line.

Investors’ big swings about where inflation and the Fed are headed led to sharp moves for markets. In January, stocks rallied and bond yields edged lower as hopes rose that inflation would cool and the Fed would ease interest rates. Then, last month’s strong data undermined expectations and sent stocks tumbling and bond yields jumping.

All told, the S&P 500 fell 62.05 points on Tuesday to 3,986.37. The Dow lost 574.98 to 32,856.46, and the Nasdaq fell 145.40 to 11,530.33.

An outlier is WW International, better known as Weight Watchers. It surged 79.1% after it said it had entered the prescription weight loss business with the purchase of telehealth platform Sequence.


AP Business Writers Yuri Kageyama and Matt Ott contributed.

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