Stocks sold off sharply Tuesday after comments from Federal Reserve Chair Jerome Powell suggested that rates may need to go higher for longer, fueling fears of a potentially larger rate hike at the central bank’s next policy meeting.
The Dow Jones Industrial Average was last down 532 points, or 1.6%, while the S&P 500 traded about 1.4% lower. The Nasdaq Composite dropped 1%. As the major stock indexes fell, the 2-year Treasury yield jumped to its highest level since 2007 at nearly 5%.
“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” Powell said in remarks to the Senate Banking, Housing and Urban Affairs Committee Tuesday morning. “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”
The comments indicated that the Fed may consider a larger rate hike than last month’s 25 basis point increase at its next policy meeting on March 21-22.
They also signaled a potential return to a half-point rate hike at central bank’s March meeting, depending on the strength of incoming economic data, according to Morgan Stanley.
At the same time, Powell’s remarks could mean that the peak rate for federal funds, also called the terminal rate, will likely go higher than previously expected, despite investor hopes that the Fed might stop hiking soon.
“This isn’t surprising news, but it’s a tough reminder for markets after such a brisk rally,” said eToro U.S. investment analyst Callie Cox. “The Fed’s top priority is getting inflation down, and for good reason. People are starting to factor in persistently higher inflation, which could be the worst-case scenario for long-term investors and run the risk of prices spiraling higher.”
Bank shares led the losses as investors feared more rate hikes will tip the economy into a recession. Wells Fargo lost more than 4%. Bank of America, Goldman…
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