NEW YORK (AP) – The Dow Jones Industrial Average sank more than 1,000 points on Friday after the head of the Federal Reserve dashed Wall Street’s hopes that it may soon ease up on high interest rates in its effort to tame inflation.
The S&P 500 lost 3.4 per cent, its biggest drop since mid-June, after Jerome Powell said the Fed will likely need to keep interest rates high enough to slow the economy “for some time” to beat back the high inflation sweeping the country.
The Dow dropped three per cent and the Nasdaq composite ended 3.9 per cent lower, reflecting a broad sell-off led by technology stocks. Higher rates help corral inflation, but they also hurt asset prices.
The Fed has indicated it will raise rates into next year as it tries to quell demand and bring down prices for goods and services. But some investors speculated the central bank might pause or even reverse course next year if inflation subsides, leading to a rally for stocks in July and early August.
Some analysts expected Powell to bat down that talk in Friday’s speech, and he delivered. His speech followed up remarks by several other Fed officials, who also pushed back on speculation the Fed might act less aggressively or even “pivot”.
“He basically said there will be pain and that they won’t stop and can’t stop hiking until inflation moves a lot lower,” said Senior Investment Strategist at Allspring Global Investments Brian Jacobsen.
Powell acknowledged the increases will hurt United States (US) households and businesses, in perhaps an unspoken nod to the potential for a recession. But he also said the pain would be far greater if inflation were allowed to fester and that “we must keep at it until the job is done”.
He was speaking at an annual economic symposium in Jackson Hole, Wyoming, which has been the setting for market-moving Fed speeches in the past.
The sell-off capped a week of choppy trading that left major indexes down four per cent or more for the week.
All told, the S&P 500 fell 141.46 points to 4,057.66. The benchmark index is now down almost 15 per cent for the year.
The Dow lost 1,008.38 points to close at 32,283.40. The last time the blue-chip average had a 1,000-point drop was in May.
The Nasdaq slid 497.56 points to 12,141.71, its biggest drop since June. The Russell 2000 index of smaller companies fell 64.81 points, or 3.3 per cent, to finish at 1,899.83.
Stocks are still showing solid gains for the third quarter, with the S&P 500 up more than seven per cent and the Nasdaq up 10 per cent. Recent earnings reports were better than some analysts had expected, and there are signs that inflation may have peaked although it remains at sharply elevated levels.
Still, Powell’s speech made clear the Fed will accept weaker growth for a while for the sake of getting inflation under control, analysts said.
“Powell reiterated that the Fed is worried about rising prices, and getting inflation under control is emphatically job number one,” said co-head of investments at Thornburg Investment Management Jeff Klingelhofer.
Perhaps giving some hope to investors, some analysts said Powell seemed to indicate expectations for future inflation aren’t taking off. If that were to happen, it could cause a self-perpetuating cycle that worsens inflation.
A report on Friday said US consumers are expecting 2.9 per cent annual inflation over the long run, which is at the lower end of the 2.9 per cent to 3.1 per cent range seen in the University of Michigan’s survey over the last year.
For now, the debate on Wall Street is whether the Fed will raise short-term rates by either half a percentage point next month, double the usual margin, or by three-quarters of a point. The Fed’s last two hikes have been by 0.75 points, and a slight majority of bets on Wall Street are favouring a third such increase in September, according to CME Group.
A report on Friday morning showed that the Fed’s preferred gauge of inflation decelerated last month and wasn’t as bad as many economists expected. It’s a potentially encouraging signal, which may embolden more of Wall Street to say that the worst of inflation has already passed or will soon.
Other data showed that incomes for Americans rose less last month than expected, while consumer spending growth slowed.
Following the reports and Powell’s comments, the two-year Treasury yield rose for much of the day, but slipped by late afternoon to 3.36 per cent from 3.37 per cent late Thursday. It tends to track expectations for Fed action.
The 10-year Treasury yield, which follows expectations for longer-term economic growth and inflation, initially rose then slipped to 3.02 per cent from 3.03 per cent late Thursday.