US stocks slumped Wednesday on speculation the Federal Reserve may hike interest rates this year to keep a lid on inflation. Higher rates can tap the brakes on accelerating prices at cash registers, but they also slow the economy and hurt prices for investments.
The Dow Jones Industrial Average went from a gain of 281 points in the morning to a drop of 507 points, or 1%, while the Nasdaq composite sank 1.4%.
The S&P 500 dropped 1.2% and erased an earlier, modest gain after the Fed released projections showing that nine of 18 policymakers foresee at least one increase to its main interest rate this year.
One important policymaker at the Fed did not give a forecast for where the federal funds rate may end 2026 and the next couple years: Chairman Kevin Warsh. In his first press conference as head of the central bank, Warsh said he’s also considering a revamp of how the Fed communicates with the market and US households and businesses.
One of his first moves was to end the inclusion of hints in Fed statements about where interest rates may be heading in the future, something called “forward guidance.”
Warsh said he wants Wall Street to react to incoming data about inflation, the job market and other economic data based on how they affect prices for stocks, bonds and other investments rather than how it expects the Federal Reserve to react to them.
As part of that, Warsh said the Fed could make changes in its usual release of projections every three months showing where Fed officials suspect interest rates, the economy and inflation are heading in upcoming years.
For now, though, Wall Street reacted uneasily to Fed officials’ latest set of projections. Stocks zigzagged up and down several times following the release. The Fed also decided to keep the federal funds rate steady at this meeting, as it has all year so far.
In the bond market, Treasury yields climbed. The yield on the 10-year Treasury, which influences rates for mortgages and other loans going to US households and businesses, rose to 4.49% from 4.43% late Tuesday. The two-year Treasury yield, which more closely tracks expectations for Fed action, jumped to 4.21% from 4.05%.
Traders upped their bets for at least one increase to the federal funds rate this year and now see an 84% probability of it, up from 59.5% a day earlier, according to data from CME Group.
High yields in bond markets worldwide caused by worries about inflation have been threatening to slow economies and undercut prices for all kinds of investments.
Oil prices were steadier Wednesday following slides earlier in the week on optimism about the tentative US-Iran deal to get the global flow of oil going again. Iran is set to take steps to reopen the Strait of Hormuz once the deal is signed, which would allow oil tankers to deliver crude from the Persian Gulf again and hopefully take pressure off inflation.
The price for a barrel of Brent crude oil rose 0.7% to $79.55. It’s still above its roughly $70 price from before the war, but it’s well below its $100-plus price from a few weeks ago.
