Stocks closed sharply lower on Wall Street and bond yields rose after the Federal Reserve stepped up its fight against inflation by raising interest rates sharply.
The S&P 500 lost 66 points, or 1.7%, to end at 3,789 points on Wednesday. The Dow Jones Industrial Average also fell 1.7%, while the Nasdaq fell 1.8%.
The Fed has raised its target rate, as expected, policymakers have raised borrowing costs for the fifth time this year. But the central bank also said it expects to keep rates high for longer and raise the Federal Funds rate to 4.6% next year, the highest level since 2007.
“The market is beginning to believe that the Fed is willing to enter a recession to drive down inflation,” Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance, said in an email.
Government bond yields continued to push towards multi-year highs. The yield on the 2-year Treasury, which usually follows Fed action expectations, rose to 4.02% from 3.97% at the end of Tuesday. It is trading at its highest level since 2007. The 10-year Treasury yield, which affects mortgage rates, fell to 3.51% from 3.56% at the end of Tuesday.
The Fed has aggressively raised rates to try to tame interest rates, which has impacted the cost of everything from food to clothing. But Wall Street worries it could brake too hard an already slowing economy and trigger a recession. Those concerns were reinforced by reports showing that inflation remains stubbornly high, even as the Fed’s own forecasts predict a sharp economic slowdown this year and next.
Central banks worldwide also have to deal with inflation. Global tensions remain high ascontinues. The Russian-controlled regions of eastern and southern Ukraine have announced plans to vote this week to join Russia. The war has claimed the lives of thousands of people, has pushed up food prices around the world and has soared energy costs.
Gasoline prices, which have fueled inflation for months, have generally fallen. But according to AAA, the average price for a gallon of gasoline rose from $3,674 to $3,681 for the first time in more than three months.
Several companies gained ground after giving investors encouraging financial updates. Cheerios maker General Mills rose 6.6% after raising its profit forecast for the year. CoverGirl owner Coty rose 5.8% after a solid update on sales growth and Walmart rose 2.8% after saying it will hire 40,000 U.S. workers for the holidays, a majority of them seasonal workers.
Cruise lines slipped as Hurricane Fiona continued to ravage the Caribbean. Carnival fell by 3.2%.