Shares fell on Wall Street on Thursday, erasing a rally a day earlier as markets assessed the effects of the Federal Reserve’s intensified fight against inflation.
The Dow Jones Industrial Average fell 1,063 points, or 3.1 percent, to 32,997 points. The S&P 500 fell 3.6%, closing at 4,146, with more than 95% of companies registered in the red benchmark index. The tech Nasdaq fell even sharper, closing almost 5% lower.
It was the second worst day for the S&P 500 since June 2020 and the worst day for the Nasdaq this month, according to FactSet.
Markets rose a day earlier after the Fed said on Wednesday it would not move as fast as some feared raising interest rates. But traders are beginning to worry more about the impact of the Fed’s actions to reduce the demand for borrowed money as it tries to cool rising inflation.
“The Fed is between a rock and a hard place, and because of immediate information, investors feel both fear and greed at the same time,” said Sam Stoval, chief investment strategist at CFRA.
Bond yields have resumed their rising tide, which will lead to higher mortgage rates. The yield on 10-year bonds rose sharply to 3.1%, reaching its highest levels since the end of 2018.
Technology companies suffered some of the biggest losses and weighed heavier on the wider market, in the opposite direction from the solid profits they made the day before. Internet retail giant Amazon fell 8.1 percent and Google’s parent company, Alphabet, fell 5.4 percent. Etsy fell 17.7% after giving a weak forecast.
Twitter rose 3% after Tesla CEO Elon Musk said he had secured more support for his bid to take over the company.
The Fed raises the key interest rate by half a percentage point of 2:25
The Fed’s aggressive change in interest rates has raised investors’ concerns about whether it could implement a complex balancing act – slowing the economy enough to stem high inflation, but not so much as to cause a downturn. A recent AllianzLife survey found that six out of 10 respondents were concerned that a major recession was “around the corner”.
“Concerns are focused on whether the Fed will have to become even more hawky to cut demand – and that would slow the economy more than currently predicted,” said Quincy Crosby, chief equity strategist at LPL Financial.
However, for now, most Wall Street economists believe the United States will emerge from recession this year, citing solid job growth, healthy consumer spending and stable corporate profits.
Markets stabilized this week before the policy update, but Wall Street worried the Fed might choose to raise interest rates by three-quarters of a percentage point in the coming months. Fed Chairman Jerome Powell eased those concerns by saying the central bank was “not actively considering” such an increase.
The central bank also announced that it will start reducing its huge balance sheet of $ 9 trillion, which consists mainly of treasury and mortgage bonds, from June 1.
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When Powell said the Fed was not considering a huge increase in short-term interest rates, it sent a signal to investors to make stock prices soar and bond yields fall. A slower rate of increase in interest rates would mean less risk of the economy in recession, as well as less downward pressure on prices for all types of investment.
But a 0.75 percent cut in the chances of a raise doesn’t mean the Fed has ended raising interest rates steadily and sharply as it struggles to curb inflation. Economists at BNP Paribas still expect the Fed to continue raising interest rates on federal funds until it reaches a range of 3% to 3.25%, from zero to 0.25% earlier this year.
“We do not think this is President Powell’s intention,” BNP Paribas economists wrote in a report, citing market jubilation on Wednesday, “and we believe we can see Fedspeak coming to tighten financial conditions again.” .
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