Dow plunges 1,008 after Fed’s Powell says interest rates will remain high

The DOW JONES industrial average fell more than 1,000 points on Friday after Federal Reserve Chairman Jerome Powell crushed Wall Street’s hopes it could soon ease high interest rates in its bid to tame inflation. / AMBER BAESLER / ASSOCIATED PRESS

NEW YORK (AP) — The Dow Jones Industrial Average fell more than 1,000 points on Friday after the Federal Reserve head crushed Wall Street’s hopes it could soon cut high interest rates in its bid to tame inflation.

The S&P 500 lost 3.4%, its biggest drop since mid-June, after Jerome Powell said the Fed will likely have to keep interest rates high enough to slow the economy “for some time” to avoid the high inflation sweeping the country. reduce. .

The Dow fell 3% and the Nasdaq composite ended 3.9% lower, following a broad sell-off led by technology stocks. Higher rates help boost inflation, but they also depress asset prices.

Investors initially struggled to understand the significance of Powell’s long-awaited speech. Stocks fell first, then wiped out nearly all of their losses, then fell decisively lower, with all but five companies in the S&P 500 ending in the red.

“He focused more on the Fed’s goals than the path,” said Jeffrey Kleintop, chief global investment strategist at Charles Schwab. “It left the market with less to grasp in terms of the future policy path.”

Powell’s speech followed several other Fed officials, who recently reversed speculation that the Fed could ease its rate hikes. The increases help to boost inflation, but they also hurt the economy and investment prices.

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Powell acknowledged that the hikes are hurting US households and businesses, perhaps an unspoken nod to the potential for a recession. But he also said the pain would be much greater if inflation continued to fester and that “we have to keep going until the job is done”.

He spoke at an annual economic symposium in Jackson Hole, Wyoming, which has historically been the setting for the Fed’s market-moving speeches.

“He basically said there will be pain and they won’t stop and they can’t stop walking until inflation is a lot lower,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments. “It was a thankfully short speech and to the point. Powell hasn’t really done any groundbreaking work, which is good since Jackson Hole isn’t a policy meeting.”

The sell-off ended a week of choppy trading, with major indices falling 4% or more for a week.

All told, the S&P 500 fell 141.46 points to 4,057.66 points. The benchmark index is now down nearly 15% for the year.

The Dow lost 1,008.38 points to close at 32,283.40. The last time the blue chip average fell 1,000 points was in May.

The Nasdaq fell 497.56 points to 12,141.71, the biggest drop since June.

The Russell 2000 Smaller Company Index fell 64.81 points, or 3.3%, to end at 1,899.83.

Over the course of the week, expectations had sprung up that Powell would try to knock down recent talks about a “pivot” by the Fed. Such speculation would have sent stocks soaring over the summer. Some investors even said the Fed could cut interest rates later in 2023, as pressures on the economy mount and the country’s high inflation hopefully eases.

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But Powell’s speech made it clear that the Fed will accept weaker growth for a while to bring inflation under control, analysts say. “Powell reiterated that the Fed is concerned about rising prices, and controlling inflation is emphatically the number one task,” said Jeff Klingelhofer, co-head of Investments at Thornburg Investment Management.

Some analysts may be giving investors hope, but some analysts said Powell was pointing out that expectations for future inflation are not getting off the ground. If that were to happen, it could trigger a self-perpetuating cycle that exacerbates inflation.

A report on Friday said U.S. consumers expect long-term inflation of 2.9% year-on-year, which is at the lower end of the 2.9% to 3.1% seen in the University of Washington’s survey last year. Michigan was seen.

For now, the debate on Wall Street is whether the Fed will raise short-term interest rates next month by half a percentage point, double the usual margin, or by three-quarters of a point. The Fed’s last two rate hikes were 0.75 points and a slim majority of Wall Street bets are in favor of a third such hike in September, according to CME Group.

A report from Friday morning found that Fed-preferred inflation slowed over the past month and was not as bad as many economists had expected. It’s a potentially encouraging sign, perhaps encouraging more Wall Street to say that the worst inflation has already passed or will happen soon.

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Other data showed Americans’ incomes rose less than expected in the past month, while consumer spending growth slowed.

Following Powell’s reports and comments, two-year government bond yields rose for much of the day, but fell to 3.36% by late afternoon from 3.37% at the end of Thursday. It tends to follow expectations for Fed action.

The yield on 10-year Treasuries, which follows longer-term expectations for economic growth and inflation, rose initially and then fell to 3.02% from 3.03% at the end of Thursday.

The Fed has already raised its key overnight interest rate four times this year in hopes of slowing down the worst inflation in decades. The increases have already hurt the housing sector, where higher mortgage rates have slowed activity. But the labor market has remained strong and has kept the economy afloat.

Investors received a new series of warnings from companies about the lingering impact of inflation and a slowing economy. Computer maker Dell fell 13.5% after it said weaker demand will hurt sales. Chipmaker Marvell Technology fell 8.9% after giving investors a disappointing earnings forecast.

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