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 hike at the central bank’s next policy meeting.
The Dow Jones Industrial Average shed 574.98 points, or 1.72%, to end at 32,856.46. The S&P 500 lost 1.53% to close at 3,986.37 and below the 4,000 level. The Nasdaq Composite dropped 1.25% to settle at 11,530.33.
As the major stock indexes fell, the 2-year Treasury yield jumped to its highest level since 2007 at 5%. Tuesday’s selloff brings the Dow into negative territory for 2023, down about 0.9%. The S&P and Nasdaq are up about 3.8% and 10.2%, respectively, for the year.
“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 the central bank’s March meeting, depending on the strength of incoming economic data, according to Morgan Stanley.
Powell’s remarks could also 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 4.7%. Bank of America, Goldman Sachs and JPMorgan Chase lost about 3% each. Mega-cap tech stocks also tumbled, with Apple, Alphabet and Microsoft falling at least 1% each.
Airline stocks bucked the broader market downtrend after the Justice Department sued to block JetBlue’s Spirit Airlines acquisition. United Airlines rose 3%. Delta and American gained 1.6% and 1.5%, respectively.
Powell’s comments raise the stakes for February’s jobs report out Friday morning, which could show a resilient labor market that allows the Fed to keep hiking. Economists expect 225,000 jobs were added last month, according to a Dow Jones survey.
