Shaken by the Federal Reserve’s aggressive stance this week on rates hikes to come, U.S. stocks fell sharply on Friday, pointing major markets toward another weekly loss.
The S&P skidded 55 points, or 1.4%, to 3,840 in morning trading. The Dow Jones Industrial Average fell 430 points, or 1.3%, to 33,851, while the Nasdaq also fell 1.3% after a brief rally.
The Fed is slowing the pace of its rate increases but signaled rates will likely remain higher over the coming few years than it had previously anticipated. That has disappointed investors who hoped recent signs that inflation is easing would persuade the Fed to lighten up on the brakes it is applying to the U.S. economy.
“The FOMC on Wednesday provided clear indications that it does not believe it has accomplished its mission to restore price stability,” Mark Haefele, chief investment officer at UBS Global Wealth Management, said in a research note. “Thursday’s comments from a wider range of top officials indicate that other central bankers also believe that more tightening is needed,” he added.
The federal funds rate stands at a range of 4.25% to 4.5%, the highest level in 15 years. Fed policymakers forecast that the central bank’s rate will reach a range of 5% to 5.25% by the end of 2023. Their forecast doesn’t call for a rate cut before 2024.
Many believed that with inflation pressures gradually easing, the Fed might soon declare some progress in their fight and perhaps even reverse course and cut rates sometime in 2023.
“U.S. stocks are declining as investors can’t shake off all the hawkish rhetoric that came from central bankers this week and as the private sector clearly entered a strong downturn,” wrote Edward Moya, senior market analyst at OANDA, in an email. “Recession risks will only grow now that [Federal Reserve Chairman Jerome] Powell has signaled that we should expect ‘ongoing increases.'”
Other analysts anticipate more disagreement on the correct approach to lowering inflation over the next year.
“In terms of monetary policy, the softer-than-expected CPI prints in October and November will likely lead to a more heated debate around the path for monetary policy in 2023. That said, we think the emphasis on cooling off the labor market and on core services ex housing services will keep the Fed on track to hike by 50bp in February and 25 bp in March resulting in a terminal rate of 5.0-5.25%,” Bank of America Global Research analysts said in a report.
Europe’s rate hikes
The latest wave of selling came after central banks in Europe raised interest rates a day after the U.S. Federal Reserve did the same, emphasizing that interest rates will need to go higher than previously expected in order to tame inflation.
Like the Fed, central bank officials in Europe said inflation is not yet corralled and that more rate hikes are coming. The European Central Bank, Bank of England, and Switzerland’s central bank all pushed through half-point rate hikes on Thursday.
“We are in for a long game,” European Central Bank President Christine Lagarde said at a news conference Thursday.
On Thursday, the S&P 500 fell 2.5%, the tech-heavy Nasdaq composite lost 3.2% and the Dow gave back 2.2%. Barring a strong reversal, major indexes will finish with losses for the second straight week.
In Asia, China’s move to relax COVID-19 restrictions has boosted hopes for an end to massive disruptions from lockdowns and other strict measures to prevent infections. But signs of sharply rising case numbers have raised uncertainty, with some alarmed over the possibility that the pandemic will continue to drag on the economy.
“Tight financial conditions and China’s biggest COVID-19 outbreak yet mean global economic growth will slow further in the first quarter of next year, dragging most commodity prices lower,” said Caroline Bain, chief commodities economist at Capital Economics.
“The slowdown will be accompanied by investor risk aversion, which will further undermine commodity prices. However, as global activity growth starts to recover from around the second quarter, we expect improved commodity demand growth and investor risk appetite to push prices higher,” she said.
Inflation fight continues
The central bank has been fighting to lower inflation at the same time that pockets of the economy, including employment and consumer spending, remain strong. That has made it more difficult to rein in high prices on everything from food to clothing.
On Thursday, the government reported that the number of Americans applying for unemployment benefits fell last week, a sign that the labor market remains strong. Meanwhile, another report showed that retail sales fell in November. That pullback followed a sharp rise in October.
In other trading Friday, benchmark U.S. crude oil lost $1.79 to $74.32 a barrel in electronic trading on the New York Mercantile Exchange. It lost $1.17 on Thursday to $76.11 per barrel.
Brent crude, the pricing basis for international trading, shed $1.90 to $79.31 per barrel.
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