An early market rally on Wall Street gave way to a broad slide for stocks and a surge in bond yields after the Federal Reserve signalled it plans to begin raising interest rates “soon” to fight a spike in inflation that the central bank says is probably getting worse.
The S&P 500 fell 0.1% after having been up 2.2% earlier in the day. The Dow Jones Industrial Average fell 0.4% after swinging more than 900 points from its high for the day. The Nasdaq ended little changed, shedding most of a 3.4% gain.
Bond yields rose, including the yield on the 10-year Treasury note, which climbed to 1.87% from 1.78% late on Tuesday. Yields affect rates on mortgages and other consumer loans.
In a statement issued after its latest policy meeting, the Fed said it “expects it will soon be appropriate” to raise rates.
Such a move is expected to happen as soon as March, as half the Fed’s policymakers have expressed a willingness to raise rates by then.
The Fed also said it would phase out its monthly bond purchases, which have been intended to lower longer-term rates, in March.
The major stock indexes initially rose after the release of the Fed statement, but shed most of their gains as Fed chairman Jerome Powell took repeated questions about how and when the central bank will start letting its balance sheet shrink after buying trillions of dollars of bonds through the pandemic.
The selling accelerated as Mr Powell acknowledged that the high inflation slamming the economy is not getting better, which could force the Fed to get even more aggressive about raising interest rates and removing the support it put in pace for markets.
“Since the December meeting, I’d say the inflation situation is about the same but probably slightly worse,” he said. “It hasn’t gotten better. It’s probably gotten just a bit worse, and that’s been the pattern.”
Mr Powell also said that there is room to raise interest rates without hurting the labour market, and would not rule out the possibility that it could raise short-term interest rates at any one of its meetings this year or raise by a larger-than-usual amount at any one.
Those comments sent a signal to Wall Street that the Fed may be more hawkish when it comes to tackling inflation, said Willie Delwiche, investment strategist at All Star Charts.
“In the market’s mind, that’s more rate hikes, and while he was clear to say that the economy is strong enough to handle those rate hikes, from a strictly (stock) market perspective, higher rates weigh on expensive stocks,” Mr Delwiche said.
The S&P slipped 6.52 points to 4,349.93. The Dow fell 129.64 points to 34,168.09. The Nasdaq rose 2.82 points to 13,542.12. The indexes are all on pace for weekly losses.