Wall Street closed again with heavy losses: investors fear an acceleration of interest rate hikes

Federal Reserve Chairman Jerome Powell on a screen on the floor of the Stock Exchange (AP Photo/Seth Wenig)
Federal Reserve Chairman Jerome Powell on a screen on the floor of the Stock Exchange (AP Photo/Seth Wenig)

Stocks fell on Wall Street on Tuesday after the head of the Federal Reserve warned it could speed up interest rate hikeswhich both affect the economy, if the inflationary pressure.

He S&P 500 fell 1.5%, the Industrial Average Dow Jones fell 1.7%, while the composite nasdaq it was down 1.2 percent.

Inflation and what the Federal Reserve is doing about it have been at the center of the wild swings on Wall Street this year. After appearing to be in a steady decline since last summer, inflation reports last month were surprisingly bullish. The same happened with other data on the economy.

Workers on the floor of the New York Stock Exchange (REUTERS/Brendan McDermid)
Workers on the floor of the New York Stock Exchange (REUTERS/Brendan McDermid)

That raised fears that inflation will hold firmer than feared and that the Federal Reserve may have to raise rates more than previously thought. Higher rates can curb inflation by slowing the economy, but they also hurt stock prices and other investments. They also increase the risk of recession later.

Its chairman, Jerome Powell, on Tuesday confirmed some of those fears, saying recent data means that “The final level of interest rates is likely to be higher than previously anticipated.” He also said in testimony before a Senate committee that the Fed is ready to increase the pace of its hikes again if necessary.

That would be a sharp turnaround after it just slowed its rate hikes to 0.25 percentage points last month, compared with previous rate hikes of 0.50 and 0.75 points.

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

The entrance to the Stock Exchange in Nuava York (REUTERS/Brendan McDermid)
The entrance to the Stock Exchange in Nuava York (REUTERS/Brendan McDermid)

After reaching virtually unchanged levels just before Powell’s testimony, shares fell immediately afterward.

“The market is returning to realistic expectations”said Megan Horneman, chief investment officer at Verdence Capital Advisors. “I think it’s going to continue to wash some of the excess out of the market.”

Wall Street had already been convincing itself that higher rates were on the way than previously thought and that the Federal Reserve might even hike rates further again after last month’s data.

Since the extraordinary report on employment and other data was published last month surprisingly solidWall Street has largely abandoned hopes it had earlier in the year about a possible rate cut by the end of 2023. It has also raised its forecast of how much the Federal Reserve will raise rates before pausing.

This has been clearest in the bond market, where the yield on the 10-year Treasury topped 4% last week and hit its highest level since November. Helps set interest rates on mortgages and other major loans.

On Tuesday, it edged closer to 4% again on comments from Powell, before easing back to 3.97% from 3.96% on Monday.

The two-year Treasury yield, which moves more in line with Fed expectations, jumped to 5.01% from 4.87% and is near its highest level since 2007.

Traders now see a roughly two in three chance that the Fed will accelerate its rate hikes and hike 0.50 percentage point on March 22. According to CME Group data, this is a change from the previous day, when they were betting that the Fed would stick with the smaller 0.25 point hike.

“If after going back to 25 points they went up to 75, the markets would freak out,” Horneman said. “I still think they’re going to go to 25, but if they go to 50, I think” it would be seen as the Fed “He is very flexible and can act quickly if necessary if the economic data tells him to.” “If they articulate that, I think the markets can accept that.”

More fireworks may arrive later this week and into the next as the Fed pulls in more data points that are sure to help shape its decision-making ahead of its next interest rate meeting later this month. .

It will be published on Friday monthly employment report of the US government. In it, most of the attention will be focused on the evolution of workers’ wages. The Fed’s fear is that too steep increases will put more upward pressure on inflation.

Next week, two reports will report on the level of inflation, both consumer and wholesale.

Big swings between investors about where inflation is headed and the Federal Reserve have caused wild moves in the markets. In January, stocks rose and bond yields fell on hopes that inflation would cool and the Federal Reserve would cut interest rates. However, last month’s torrent of strong data dashed those expectations, sending stocks tumbling and bond yields rising.

(With information from AP)

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