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Stocks fell Wednesday to give back some gains after rising a day earlier, as investors contemplated the potential for the Federal Reserve to take an even more aggressive approach to reining in inflation.
The S&P 500 dipped after the index gained more than 1% on Tuesday. The Dow and Nasdaq each also opened lower. Crude oil prices gained, and West Texas intermediate added nearly 4% to close in on $114 per barrel.
U.S. stocks have see-sawed between gains and losses this week as investors weighed Fed Chair Jerome Powell’s hawkish remarks from earlier this week. Powell, speaking at a National Association for Business Economics Conference on Monday, said the central bank would take “the necessary steps to ensure a return to price stability,” and would be willing to raise the benchmark interest rate by more than 25 basis points at a forthcoming meeting if deemed necessary to curb fast-rising prices.
These remarks — which came less than a week since Powell’s last public remarks at the end of the Fed’s last policy-setting meeting last Wednesday — were taken as a surprisingly quick shift in tone, highlighting the urgency key policymakers saw in addressing inflation.
“My belief going in, prior to [Monday] had been that the Federal Reserve truly in their heart of hearts believed that inflation is transitory in nature, and we will see it come down over the summer,” Jeff Klingelhofer, Thornburg Investment Management co-head of investments, told Yahoo Finance Live on Tuesday. “What we saw from Jerome Powell [Monday] is that his confidence is shaken.”
“If we have another high inflation print, I think the market will have to start pricing in the potential for 50 basis point rate hikes, even the potential for an inter-meeting hike, and a Fed that is truly scared of inflation being out of control,” he added.
The Fed last week raised interest rates for the first time since 2018, bringing the benchmark rate up by 25 basis points off near-zero levels. The Federal Open Market Committee (FOMC), as of last Wednesday, also telegraphed that its median member expected there would be another six quarter-point rate hikes this year.
Heading into this, stocks traded with heightened volatility throughout 2022 as investors priced in the potential that higher interest rates and otherwise tighter financial conditions would weigh on equity valuations. Uncertainty around the progression of Russia’s invasion in Ukraine has also remained a point of concern. Still, some strategists noted that investors have less to worry about at least in the near-term when it comes to the impact of the start of Fed hiking cycles.
“Equities tend to continue their upwards march in the nine months after the Fed begins to tighten, as the strong economy that enabled hikes supports growth,” Deutsche Bank strategists including Jim Reid, head of credit strategy and thematic research, wrote in a note. “After that, equities become more volatile and are more likely to experience a drawdown. Ten-year Treasury yields start increasing, sending their prices lower, but eventually flatten out and decline as markets put increasing probabilities on the next recession coming. History suggests we should not be worried about near-term impacts.”
Elsewhere, investors also continued to monitor developments in Russia’s war in Ukraine and the global response. President Joe Biden is set to travel to Brussels Wednesday before convening in a summit of all NATO allies, in a meeting that will set the stage for the announcement of more sanctions against Russia and greater humanitarian aid for Ukraine.
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