NEW YORK – Shares fell sharply on Wall Street on Thursday amid growing fears that higher interest rates, which the Federal Reserve uses in its fight against inflation, will slow the economy.
The S&P 500 fell 3.6%, wiping out the rally the day before and marking its biggest loss in almost two years. The Dow was down 1063 points, or 3.1%. Technical stocks fell the most, pulling the Nasdaq down 5%.
On Wednesday, the Fed raised the reference interest rate by half a percentage point as part of efforts to slow consumer borrowing and reduce inflation, which is at its four-decade high. The market strengthened when Fed Chairman Jerome Powell dismissed the possibility that the Fed could turn to a more aggressive increase by three-quarters of a point in the future.
Now traders are beginning to worry more about the impact of Fed moves to reduce demand and slow the economy.
“The Fed is between stone and anvil, and because of instant information, investors feel fear and greed at the same time,” said Sam Stoval, CFRA’s chief investment strategist.
Bond yields have recovered upwards. Yields on 10-year Treasury bonds rose to 3.04%.
The Fed’s aggressive shift in interest rates is raising investors to worry about whether it will be able to delay the thin dance to slow the economy enough to stop high inflation, but not enough to cause a downturn. The rate and size of interest rate hikes are being closely studied on Wall Street.
“Investors have realized that by continuing the Fed’s very prudent approach, it could allow inflation to stay out of control,” Stoval said.
The Fed’s latest move to raise interest rates by half a percentage point was highly anticipated. Markets stabilized this week before policy renewal, but Wall Street was concerned that the Fed could raise rates by three-quarters of a percentage point at its next meeting. Powell eased those concerns by saying the central bank was “not actively considering” such an increase.
The central bank also announced that from June 1 will begin to reduce its huge balance sheet by $ 9 trillion, which consists mainly of treasury and mortgage bonds. These large holdings are a policy tool that the Fed uses to keep long-term interest rates, such as mortgages, down.
When Powell said the Fed was not considering a grand increase in short-term rates, it signaled to investors that stock prices were rising and bond yields were declining. A slower rate of interest rates will mean less risk of the economy going into recession, as well as less downward pressure on all types of investment.
But reducing the chances of an increase of 0.75 points does not mean that the Fed is steadily and sharply raising rates, fighting to curb inflation, even close. Economists at BNP Paribas continue to expect the Fed to continue raising rates on federal funds until it reaches a range of 3% to 3.25%, from zero to 0.25% earlier this year.
“We believe this was not the intention of Chairman Powell,” BNP Paribas economists said in a report, referring to the joy of the market on Wednesday, “and we believe we can see that Fedspeak is committed to tightening financial conditions again.”
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The Bank of England on Thursday raised the base interest rate to its highest level in 13 years, the fourth rate increase since December, when inflation in the UK reached 30-year highs.
Energy markets remain volatile as the conflict in Ukraine continues and demand remains high amid limited oil supplies. European governments are trying to replace energy supplies from Russia and are considering imposing an embargo. OPEC and allied oil-producing countries decided on Thursday to gradually increase the flow of oil they send to the world.
Higher oil and gas prices contribute to investor uncertainty as they try to assess how inflation will ultimately affect business, consumer activity and overall economic growth.
Recent corporate earnings reports are also being closely monitored by investors, trying to get a better idea of the impact of inflation on the economy. Shares of groats producer Kellogg rose after announcing encouraging financial results. Etsy shares stumbled after a weak forecast.
Shares of Twitter rose after Tesla CEO Elon Musk said he had received more support for his bid to seize the company.
Technology companies have suffered some of the biggest losses and hampered the broad market, moving away from the solid profits they received the day before.
The average rate on a 30-year fixed-rate mortgage this week rose to 5.27%, the highest level since 2009, according to mortgage buyer Freddie Mack. A year ago, it averaged 2.96%. Mortgage rates tend to match the yield current of a 10-year treasury. The sharp rise in mortgage rates has strained affordability for home buyers after years of sharp price increases.