Interest rate signal hits US stocks

Stocks slumped and bond yields rose on Wednesday as Wall Street interpreted the minutes of the recent Federal Reserve policymakers meeting as a sign that the central bank is ready to accelerate interest rate hikes this year as it fights inflation.

The S&P 500 fell 1.9%, its biggest drop since September, as tech companies pushed the market down sharply. The tech-heavy Nasdaq composite fell 3.3%, its worst drop since February. The Dow Jones Industrial Average fell 1.07%, retreating from the record it set a day earlier.

The S&P 500 lost 92.96 points to 4,700.58. The Dow Jones lost 392.54 points to 36,407.11. The Nasdaq lost 522.54 points to 15,100.17.

Small business stocks also posted significant losses. The Russell 2000 lost 74.87 points, or 3.3%, to 2,194.

Bond yields rose after the release of the Fed meeting minutes. The yield on the 10-year Treasury bill, a benchmark for pricing mortgages and many other types of loans, rose to 1.70% soon after the minutes were released, from 1.68% just before. . It has not been at 1.70% since April.

The Fed minutes showed that policymakers at their meeting last month expressed concerns that inflation, which has peaked in four decades, is spreading to more areas of the world. economy and lasts longer than expected. Fed officials also concluded that the US labor market was nearing sufficiently healthy levels that the Fed’s low interest rate policies were no longer necessary.

For both of these reasons, Fed Chairman Jerome Powell said after the December 14-15 meeting that the central bank was accelerating the reduction of its ultra-low interest rate policies.

Even so, Wall Street appeared to read the minutes as a sign that the central bank may be more aggressive in reversing the economic stimulus policies it put in place after the pandemic, which could mean a longer path. fast towards higher interest rates.

“We believe the Fed is likely to raise interest rates faster and potentially reduce its balance sheet sooner than many think, because it signals that it is more important to fight inflation than to protect against a downturn in economic activity, ”said Chris Zaccarelli, Investment Director of Independent Advisor. Alliance.

Fed minutes show policymakers discussed how they may need to raise short-term interest rates at a faster rate and allow their bond purchases to proceed sooner than they do. have done so in previous attempts to bring interest rates back to normal.

“They noted that current conditions included a stronger economic outlook, higher inflation and a larger balance sheet and could therefore justify a potentially faster pace of policy rate normalization,” the minutes said.

The message seemed to catch bond investors, in particular, off guard.

“The Fed has spoken, but the bond market has not listened,” said Willie Delwiche, investment strategist at All Star Charts. “That started to change this week, and today’s minutes echo what the bond market is starting to reflect this week, and [stocks] take note. “

About 80% of the stocks in the benchmark S&P 500 fell. The main drag on the index was tech companies, which led gains on Monday and then pulled the broad market on Tuesday. Microsoft fell 3.8% and software maker Adobe lost 7.1%.

A mix of retailers and other businesses that rely on consumer spending has also lost ground. Tesla slipped 5.4% and Amazon fell 1.9%.

AT&T rose 2.2% after giving investors an encouraging update on growth in subscriber numbers.

European markets closed largely higher and Asian markets largely lower overnight.

Investors face a busy first week of the New Year with a wide array of economic data. The latest reports on different sectors of the economy and the job market come out as Wall Street continues to assess the potential economic impact of rising inflation and the latest wave of covid-19 cases.

Today, the Institute for Supply Management will release its service sector index for December, giving Wall Street a better idea of ​​how the largest sector of the economy is handling the latest wave of covid-19 cases. the highly contagious variant of omicron.

The Ministry of Labor will publish its monthly employment report for December on Friday.

Stephen V. Lee