Stocks plunge, dragging Wall Street toward another down week
Wall Street suffered sharp declines on Friday as recession fears took hold of investors following the Federal Reserve's latest interest-rate hike. Major U.S. indices finished the week with losses for the fourth time in five weeks.
Markets sold off around the world on mounting signs the global economy is weakening just as central banks raise the pressure even more with additional hikes to interest rates. The S&P 500 fell 64 points to 3,693, or 1.7%, close to its 2022 low. The Dow Jones Industrial Average dropped 486 points, or 1.6%, its lowest point of the year. The Nasdaq fell 1.8%.
Energy prices also closed sharply lower as traders worried about a possible recession. Treasury yields, which affect rates on mortgages and other kinds of loans, held at multiyear highs. U.K. government bond yields snapped higher after that country's new government announced a sweeping plan of tax cuts.
"Markets here and abroad are being whipsawed by tough-talking central bankers as they continue assertive monetary policy to bring inflation under control," Quincy Krosby, chief global strategist for LPL Financial, said in an email.
Oil prices fell 3%, threatening to fall below $80 per barrel for the first time since early January.
Global recession fears
Central banks in Britain, Switzerland, Turkey and the Philippines all raised interest rates after the Fed hiked its key rate on Wednesday for a fifth time this year and indicated more increases were on the way.
"Global equities are struggling as the world anticipates surging rates will trigger a much sooner and possibly severe global recession," Edward Moya of Oanda said in a report.
Investors worry central banks might be willing to tolerate a painful economic slump to get prices under control.
Some point to signs the U.S. economy is cooling as support for the Fed to back off plans for more rate hikes. But Chair Jerome Powell said Wednesday rates will be kept elevated for an extended time if needed to get inflation back to its 2% target.
U.S. consumer inflation eased to 8.3% in August from the previous month's 9.1% peak, although prices remain near a four-decade high as costs for items such as food and rent continue to climb. Core inflation, which strips out volatile food and energy prices to give a clearer picture of the trend, rose to 0.6% over the previous month, up from July's 0.3% increase. That indicated pressure for prices to rise still was strong.
"Price levels continue to increase — they aren't slowing down month-over month (e.g. accelerating, not decelerating) and this inflation problem isn't going away quietly," Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance, said in a note last week.
The Fed on Wednesday lifted its benchmark rate, which affects many consumer and business loans, to a range of 3% to 3.25%. It released a forecast showing it expects that benchmark rate to be 4.4% by the year's end, a full point higher than envisioned in June.
Despite the economic impact of ratcheting up rates, Fed Chair Jerome Powell sounded a hawkish note in affirming his commitment to lowering inflation.
"Reducing inflation will likely require a sustained period of below-trend growth, and it will very likely require a softening of labor conditions," he said at a press conference Wednesday.
"We will keep at it until we are confident the job is done," Powell added.
Backing the Fed's aggressive moves, Brad McMillan, chief investment officer for Commonwealth Financial Network, described the current market decline as nothing unusual.
"The Fed is performing surgery right now on the economy," said McMillan in an analyst note. "In the short run, it is painful. But in the long run? It is a healing process and one that sets the stage for a healthier economy and markets. Again, we have seen this before."