Wall Street’s main stock indexes fell on Tuesday after the Federal Reserve warned it could accelerate its rate hikes if inflation remains rampant.
At the closing bell, the Dow Jones Industrial Average was down 574 points, or 1.72%, erasing gains made at the start of 2023 and turning negative for the year to date.
The benchmark S&P 500 lost 1.53% and the tech-heavy Nasdaq Composite fell 1.25% after Fed Chair Jerome Powell warned that “final interest rate levels are likely to be higher than previously expected”.
Inflation and the Fed’s attempts to tame it by cooling the economy with rate hikes have been at the heart of Wall Street’s wild swings this year.
After what appeared to be a steady decline since last summer, reports on inflation came surprisingly hot last month, along with strong employment and consumer spending data that showed little weakening in demand.
Wall Street’s main stock indexes fell on Tuesday after the Federal Reserve warned it could accelerate its rate hikes if inflation remains rampant
The Dow turned negative for 2023 after shedding 574 points on Tuesday
He also said in his testimony that the Fed stands ready to increase the pace of its rate hikes again if necessary.
That would be a sharp reversal after just slowing its pace of hikes last month to 0.25 percentage point from earlier hikes of 0.50 and 0.75 percentage point.
“If the body of data suggested that faster tightening was warranted, we would be willing to increase the pace of rate hikes,” Powell said. “Restoring price stability will likely require us to maintain a restrictive monetary policy stance for some time.”
“With markets fully focused on Fed Chair Powell’s comments today, it didn’t take long for him to deliver the goods,” noted Jesse Wheeler, an economic analyst at decision intelligence firm Morning Consult.
“Following Powell’s hawkish comments, all eyes will be on the BLS jobs report due out this Friday, with investors looking for signs the job market is slowing which could allow the Fed to ease its stance a little,” added Wheeler.
In his testimony, Powell also claimed that Congressional spending had little impact on inflation.
In response to a question from Sen. John Kennedy, R-La., about what Congress could do to fight inflation, Powell said, ‘I don’t think fiscal policy is a huge factor driving inflation right now.’
It’s a notable remark given that the Fed chair usually tries to stay away from commentary on fiscal policy.
The benchmark S&P 500 fell 1.53% after Powell’s comments
The tech-heavy Nasdaq Composite fell 1.25% on Tuesday
Inflation and the Fed’s attempts to tame it by cooling the economy with rate hikes have been at the heart of Wall Street’s wild swings this year
Powell told the committee that “final interest rate levels are likely to be higher than previously expected” and “if the body of data indicated that faster tightening was warranted, we would be prepared to increase the pace of rate hikes.”
The Fed’s interest rate target range is currently 4.5 to 4.75 percent. According to the Consumer Price Index, January prices rose 6.4 percent year-on-year and 0.5 percent month-on-month. That was slightly lower than December’s numbers, but still well above the Fed’s target.
The Federal Reserve could continue raising interest rates if inflation doesn’t fall faster and the economy doesn’t cool, Chairman Jerome Powell told Banking Committee senators on Tuesday
The central bank raised interest rates by a quarter-point in early February, after enforcing a half-point hike in December and four three-quarter-point hikes before that.
In the past year, the central bank has raised interest rates eight times, which affect much consumer and business credit.
Economists had expected the Fed to hike rates by 0.25 percentage point, or 25 basis points, at its next meeting on March 21-22. Powell’s comments now suggest the hike could be as much as 50 basis points.
Banking Committee Chairman Sen. Sherrod Brown criticized the Fed’s continued rate hikes. “This is a complex problem, and so is interest rates, a single, blunt one,” said Brown, D-Ohio.
January was the seventh consecutive month of falling annual inflation from a peak of over 9% this summer.
The US Federal Reserve raised its target interest rate by a quarter of a percentage point, slowing from the rapid hikes implemented last year
Powell also warned that rate hikes could become more frequent
“Certainly raising interest rates won’t stop big companies from taking advantage of all these crises to inflate prices well beyond the increase in their costs,” he added, ticking off other factors that contribute to inflation, such as the Russian war against Ukraine.
Senator Tim Scott, the top Republican on the committee, countered that if Congress had kept federal spending under control, the Fed would not need to initiate these hikes.
“We will continue to make our decisions meeting after meeting,” Powell said. “Although inflation has moderated in recent months, the process of bringing inflation back to 2% still has a long way to go and will likely be bumpy.”
Consumer inflation rose 6.4% year-on-year in January, higher than economists had expected.
While January marked the seventh consecutive month of a fall in annual inflation from a peak of more than 9% this summer, it also represented a smaller fall than expected in December, leading some economists to fear that the fight against the rising prices could stall.
More fireworks could arrive later this week and into next as the Fed gets more data points that will surely help inform its decision making ahead of its next rate meeting later this month.
The US government’s monthly jobs report is coming out on Friday. Most attention will be focused on how high wages are for workers. The Fed fears that excessive earnings could lead to more upward pressure on inflation.
Then two reports next week will provide information on how high inflation remains at both the consumer and wholesale levels.