Dow Jones falls 3 percent after Fed Chair Powell warned against keeping interest rates high


NEW YORK (AP) – The Dow Jones Industrial Average fell more than 1,000 points on Friday after the Federal Reserve chief dashed Wall Street’s hopes that it could soon ease high interest rates in its effort to tame inflation .

The S&P 500 slipped 3.4 percent, its biggest drop since mid-June, after Jerome Powell said the Fed will likely have to keep interest rates high enough “for some time” to slow the economy to stave off high inflation that captured the country.

CLOCK: US Federal Reserve Chairman Powell warns interest rates could rise ‘for some time’

The Dow fell 3 percent and the Nasdaq Composite closed 3.9 percent lower, reflecting a broad sell-off led by technology stocks. Higher interest rates support corral inflation, but they also hurt asset prices.

Investors initially struggled to understand the meaning of Powell’s much-anticipated speech. Stocks fell first, then recouped almost all of their losses and then fell significantly, with all but five S&P 500 companies in the red.

“He was more focused on the Fed’s goals than the journey,” said Jeffrey Kleintop, Charles Schwab’s chief global investment strategist. “This left the market with less to achieve in terms of the future path of politics.”

Powell’s speech tied in with several other Fed officials who have recently quashed speculation that the Fed may ease its rate hikes. The increases help corral inflation, but they also hurt the economy and investment prices.

Powell acknowledged that the hikes will hurt US households and businesses, perhaps as an unspoken nod to the potential for a recession. But he also said the pain would be far greater if inflation were allowed to fester and that “we have to keep going until the job is done”.

He was speaking at an annual economic symposium in Jackson Hole, Wyoming, which has been the scene of market-moving Fed speeches in the past.

“He was basically saying there’s going to be pain and it won’t stop and can’t stop hiking until inflation is much lower,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments. “It was a thankfully short speech and to the point. Powell wasn’t really breaking new ground, which is good since Jackson Hole isn’t a political gathering.”

The sell-off capped a week of choppy trading that left major indices down 4 percent or more for the week.

Overall, the S&P 500 fell 141.46 points to 4,057.66. The benchmark index has now fallen by almost 15 percent over the year.

The Dow lost 1,008.38 points to close at 32,283.40. The blue chip average was last down 1,000 points in May.

The Nasdaq slipped 497.56 points to 12,141.71, its biggest drop since June.

The Russell 2000 index of smaller companies fell 64.81 points, or 3.3 percent, to 1,899.83.

Expectations had been building over the week that Powell would try to quash recent rumors of a Fed pivot. Such speculation helped push shares higher over the summer. Some investors even said the Fed could cut interest rates later in 2023 as pressure on the economy mounts and the country’s high inflation hopefully eases.

But Powell’s speech made it clear that the Fed will accept weaker growth for a while in a bid to contain inflation, analysts said. “Powell reiterated that the Fed is concerned about rising prices and getting inflation under control is clearly task number one,” said Jeff Klingelhofer, co-head of investments at Thornburg Investment Management.

Perhaps some analysts are giving investors hope that Powell appears to be suggesting that expectations for future inflation are not taking off. Should this happen, it could lead to a self-perpetuating cycle that makes inflation worse.

According to a report on Friday, long-term US consumers expect annual inflation to come in at 2.9 percent, which is at the low end of the 2.9 percent to 3.1 percent range recorded in the University of Michigan survey over the past year was found.

CONTINUE READING: Inflation eased in July as consumer prices and incomes rose

Right now, Wall Street is debating whether the Fed will hike short-term interest rates by either half a percentage point, twice the usual margin, or three-quarters of a point next month. The Fed’s last two rate hikes were 0.75 points, and a slim majority of Wall Street bets are in favor of a third such hike in September, according to CME Group.

A Friday morning report showed that the Fed’s preferred indicator of inflation has been slowing over the past month and hasn’t been as bad as many economists were expecting. It’s a potentially encouraging signal that could encourage more Wall Street to say that the worst of inflation is either over or about to happen.

Other data showed that Americans’ incomes rose less-than-expected last month, while consumer spending growth slowed.

Following the reports and Powell’s comments, the two-year Treasury yield rose for most of the day but slipped to 3.36 percent by late afternoon, from 3.37 percent late Thursday. It tends to track expectations for Fed action.

The 10-year Treasury yield, which tracks expectations for longer-term economic growth and inflation, rose before falling to 3.02 percent from 3.03 percent late Thursday.

The Fed has already raised its federal funds rate four times this year in hopes of slowing the worst inflation in decades. The rate hikes have already hurt the housing industry, where higher mortgage rates have slowed activity. But the job market has remained strong and has helped support the economy.

Investors received a raft of fresh warnings from companies about the ongoing impact of inflation and a slowing economy. Computer maker Dell fell 13.5 percent after saying weaker demand will hurt sales. Chipmaker Marvell Technology fell 8.9 percent after giving investors a disappointing earnings forecast.

AP business writer Joe McDonald contributed. Veiga reported from Los Angeles.


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