NEW YORK ( Associated Press) – Shares on Wall Street are falling, eroding the rally from a day earlier, as markets assess the fallout from the Federal Reserve’s sharp fight against inflation.
On Wednesday, the Fed raised its benchmark interest rate by half a percentage point as an effort to slow consumer lending and tame inflation, which is at a four-decade high. Markets rose when Fed Chairman Jerome Powell dismissed the possibility that the Fed could resort to more aggressive three-quarter point growth in the future.
Now, traders are becoming more concerned about the impact of the Fed’s moves to reduce demand and slow the economy.
“The Fed is between a rock and a hard place, and investors are experiencing both fear and greed at the same time because of the immediate notification,” said Sam Stovall, chief investment strategist at CFRA.
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The S&P 500 was down 3.4 percent as of 1:49 p.m. Eastern, with more than 95 percent of the companies in the benchmark index in the red. The Dow Jones Industrial Average ended 1,035 points, or 3 per cent, down at 33,024 and the Nasdaq 4.8 per cent lower.
Bond yields resumed their upward march. The yield on the 10-year Treasury rose sharply to 3.10 percent from 2.92 percent a day earlier.
The Fed’s aggressive shift to raise interest rates has investors worried about whether it can pull off the delicate dance of slowing the economy to stave off high inflation but not so much as to cause a recession. Can you The pace and size of interest rate hikes are being closely scrutinized on Wall Street.
“Investors realized that by continuing to take a very measured approach by the Fed, it could actually allow inflation to spiral out of control,” Stovall said.
The latest move by the Fed to raise interest rates by half a percentage point was widely expected. Markets held steady this week ahead of the policy update, but Wall Street worried the Fed could elect to raise rates by three-quarters of a percent at its next meeting. Powell downplayed those concerns, saying the central bank is “not actively considering” such increases.
The central bank also announced that it would begin shrinking its massive $9 trillion balance sheet, which mainly consists of Treasury and mortgage bonds, starting June 1. Those large holdings are a policy tool the Fed uses to keep long-term interest rates, such as those on mortgages, low.
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When Powell said the Fed was not considering a drastic hike in short-term rates, it sent a signal to investors for rising stock prices and declining bond yields. A slower rate of interest rate hikes would mean less risk of the economy going into recession, as well as less pressure on prices for all types of investments.
But lowering the odds of growth to 0.75 points doesn’t mean the Fed is raising rates consistently and rapidly as it fights to bring down inflation, not even close. Economists at BNP Paribas still expect the Fed to continue raising the federal funds rate until it reaches a range of 3 percent to 3.25 percent from zero to 0.25 percent earlier this year.
“We do not think this was Chair Powell’s intent,” economists at BNP Paribas wrote in a report on Wednesday, citing market happiness.
The Bank of England on Thursday raised its benchmark interest rate to the highest level in 13 years, its fourth rate hike since December as UK inflation hit a 30-year high.
Energy markets remain volatile as conflict in Ukraine continues and demand remains high amid tight oil supplies. European governments are trying to divert energy supplies from Russia and are considering imposing sanctions. OPEC and allied oil producing countries on Thursday decided to gradually increase the flow of crude to the world.
Higher oil and gas prices are contributing to uncertainties weighted on investors as they attempt to assess how inflation will ultimately affect businesses, consumer activity and overall economic growth.
The latest corporate earnings report is also being watched closely by investors trying to get a better picture of the impact of inflation on the economy. Cereal maker Kellogg rose 4 percent after reporting encouraging financial results. Etsy stumbled 17 percent after giving a weaker forecast.
Tesla CEO Elon Musk said Twitter grew 3.2 percent after Twitter garnered more support for his bid to take over the company.
Technology companies suffered some of the biggest losses and the broader market weighed in, in contrast to the solid gains made the day before. Internet retail giant Amazon fell 7 per cent and Google’s parent company 4.6 per cent.
Homebuilders fell largely as average long-term home loan rates climbed. Dr. Horton slipped 5.5 percent.
According to mortgage buyer Freddie Mac, the average rate on a 30-year fixed-rate mortgage rose to 5.27 percent this week, its highest level since 2009. It averaged 2.96 per cent a year ago. Mortgage rates follow moves in the 10-year Treasury yield. The sharp rise in mortgage rates after several years of rapidly rising prices has hit affordability for home buyers.
Associated Press Business Writer Stan Cho contributed. Vega reported from Los Angeles.