U.S. stock indexes dropped Tuesday as Federal Reserve Chair
Jerome Powell
told the Senate that the central bank would likely lift interest rates more than previously expected to fight inflation and cool down the economy.
The S&P 500 fell 0.9% by around midday, with all 11 sectors in the index in the red. The Nasdaq Composite dropped 0.4%, while the Dow Jones Industrial Average declined 1%
Government bonds rose in price. That pushed the yield on 10-year Treasurys down to 3.945% from 3.981% Monday.
In the first of two hearings on Capitol Hill this week, Mr. Powell told the Senate Banking Committee that robust economic activity in recent weeks has partly reversed softening inflation trends from late last year. That could prompt officials at the central bank’s meeting this month to consider more aggressive rate increases.
“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,” Mr. Powell said in prepared remarks. “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.”
Investors have already come around to the same view after a streak of economic data showed continued strength in U.S. hiring, spending and factory production. Federal unemployment numbers due Friday, as well as updated data on the consumer price index slated for next Tuesday, could add clarity before Fed officials’ March 21-22 meeting.
Stock and government-bond markets stumbled last month as money managers began to doubt that the central bank could engineer what is known as a soft landing, when inflation recedes without a recession.
“So far, nothing is working for them this year,” said John Augustine, chief investment officer for Huntington National Bank. “They haven’t slowed down employment, they haven’t slowed down the economy and they haven’t slowed down inflation to levels they want. ”
Stocks have stabilized in March, but investors remain cautious given the prospect for a further rise in borrowing costs. The S&P 500 has climbed more than 1% this month, extending its gains for the year to 4.6%.
Fed Chair Jerome Powell’s congressional testimony this week will be a focus of investors.
Photo:
ANDREW KELLY/REUTERS
Last month, the Fed raised its benchmark federal-funds rate by a quarter-percentage-point to a range between 4.5% and 4.75%. It slowed the pace of rate rises following increases of a half-point in December and 0.75 point in November.
But some investors now expect the central bank to again accelerate rate increases in the hope of cooling the labor market and overall inflation.
Traders in interest-rate futures expect the federal-funds rate to reach as high as 5.6% in October and sit around 5.5% at year-end, according to FactSet. In early February, before a string of economic data sparked revised wagers, traders forecast the benchmark rate topping out around 4.9% in July before falling near 4.5% through December.
Joseph Little, chief strategist at HSBC Asset Management, expects the Fed will raise rates to about 5.5% by mid-year before cutting them at the end of 2023 as the economy slips into recession.
“We are experiencing the fallout from this rapid period of monetary tightening,” Mr. Little said. He said his institution is wary of stocks and corporate bonds, which he said look expensive given how high interest rates are heading and a likely downturn in company profits.
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In currency markets, the dollar strengthened, pushing the WSJ Dollar Index up 0.9%. It has climbed 3.5% since the end of January, driven by expectations that the Fed will keep raising rates to curb inflation.
Among individual stocks,
rose 1.3% Tuesday. Facebook and Instagram’s parent company is set to lay off thousands more employees, according to Bloomberg News, which would extend a period of job cuts at the tech giant.
which has recently faced a series of difficulties on the manufacturing floor, fell about 12%. The electric-vehicle maker said it plans to sell $1.3 billion in convertible notes in a private offering.
Global markets were mixed. The Stoxx Europe 600 edged down 0.8%, as losses for banks offset gains for the utility sector. Japan’s Nikkei 225 rose 0.3%.
Chinese stocks fell, after trade data showed Chinese imports and exports both shrank in the first two months of the year, complicating Beijing’s efforts to juice the economy. The Shanghai Composite Index lost 1.1%.
A modest retreat in commodity markets pulled most-active Brent-crude futures down 2.6% to $83.97 a barrel and copper forwards down 1.4% to $8,819 a metric ton in London. The Chinese data showed the country’s oil and copper imports fell in early 2023.
Write to Joe Wallace at joe.wallace@wsj.com and David Uberti at david.uberti@wsj.com
Corrections & Amplifications
The yield on the benchmark 10-year Treasury note hovered around 3.993% at the start of Fed Chair Jerome Powell’s testimony before the Senate. An earlier version of this article incorrectly said it was 3.933%. (Corrected on March 7)
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