Stocks fell sharply on Friday as the Federal Reserve signals it is ready to hike interest rates to fight inflation.
As the afternoon sell-off accelerated, the S&P 500 fell 122 points, or 2.8%, to close at 4,272. The Dow Jones Industrial Average fell 981 points, or 2.8%, and the tech-heavy Nasdaq Composite was down 2.5%. Stocks lost ground before the start of trading after Federal Reserve Chair Jerome Powell indicated that aggressive rate hikes were needed to fight inflation.
“The combination of Jerome Powell’s comments and some disappointing earnings news was too much for investors to handle over the weekend,” Comerica Wealth Management chief investment officer John Lynch said in an email. “Additionally, market-based break-even inflation expectations are rising, providing a more telling statement about the potential for continued price pressures than the headlines suggest.”
In a panel held by the International Monetary Fund on Thursday, Powell said the Fed must act faster than before to tackle high inflation, suggesting sharp rate hikes are likely in the coming months.
Rate hike expected by half a point
“I would say there’s going to be 50 basis points on the table for the May session,” Powell said.
Powell’s comments come at a time when the US is facing its worst inflation in 40 years. The consumer price index, which tracks a basket of goods and services, rose 8.5% year-on-year in March.
To stem this rise, the Fed has already announced a quarter-point rate hike. Wall Street analysts are now expecting a half a percentage point rate hike at their next meeting in two weeks. Other central banks have also hiked interest rates to mitigate the impact of rising prices on businesses and consumers.
Historically, the Fed has typically hiked its short-term benchmark interest rate in more modest quarter-point increments. But policymakers believe the economy is on firm ground and they can avoid triggering a recession while keeping inflation under control. Economic data shows that conditions in the labor market are tight, while the manufacturing sector continues to recover on the back of strong consumer demand.
“We continue to expect two 50 basis point rate hikes in May and June,” Rubeela Farooqi, chief US economist at High Frequency Economics, said in a report. “Any subsequent measures will depend not only on the path of inflation, but also on the economy’s reaction to the rapid rate hikes over the next few months.”
Bond yields have gained ground as investors prepare for higher interest rates. The yield on the 10-year Treasury bond remained steady at 2.92% on Friday after hovering near its highest level since late 2018.
eyes on Ukraine
Investors are also watching developments in Ukraine, anticipating further disruptions to global supply chains and market volatility as Russian President Vladimir Putin’s brutal war continues.
“Under the weight of war, global energy and food risk, stock markets could well fall, unfortunately in quite spectacular fashion. We’ve been saying for some time that the only way to protect your investment portfolio is to be careful with stocks and buy gold, oil and the US dollar,” said Clifford Bennett, chief economist at ACY Securities.
Despite the uncertainty and rising prices, Powell remains optimistic about the economic outlook.
“The US economy is very strong and doing very well according to most forecasts,” he said.
Benchmark US crude fell $1.07 to $102.72 a barrel. It rose 1.6% on Thursday and is up about 40% for the year. This has made gasoline more expensive, cutting deeper into consumers’ wallets. Brent crude, the international standard, fell $1.04 to $106.92 a barrel.