Stocks fall on prospect of Fed rate hikes as soon as 2022
Stocks lurched on Friday, with the Dow having its worst week since October, after a Federal Reserve official said that the nation's central bank might need to raise interest rates sooner than expected.
The S&P 500 fell 1.3% and gave back 1.9% over the course of the week. Every sector in the benchmark index fell, with the largest declines coming from banks and technology companies that soared earlier this year on expectations for an expanding economy and steady inflation.
The Dow lost 1.6% on Friday, falling 3% over the week. The tech-heavy Nasdaq dropped 0.9% on the day, falling 45 basis points on the week.
St. Louis Federal Reserve President James Bullard told business news channel CNBC on Friday that he expects the Fed's first interest rate increase could come as soon as 2022. That's faster than what the Federal Reserve said on Wednesday, when a forecast by policymakers put the consensus estimate of interest rate hikes in 2023.
The quickly recovering economy after the pandemic has caused a degree of inflation, with prices for basic materials like lumber, copper and oil rising as well as other goods like airline tickets and used cars. The general consensus is that the inflation will be temporary and is a result of an economy recovering from near depression levels, but part of the Fed's mission is to keep prices under control.
"You just don't have the firms able to build capacity to meet demand," said Ken Johnson, investment strategy analyst at Wells Fargo Investment Institute. "Investors are nervous about that."
The first action the Fed is likely to take would be a slowdown in its $120 billion of monthly bond purchases, which are helping to keep mortgages cheap, but such a tapering is still likely "a ways away," Chair Jerome Powell said at a news conference Wednesday.
Higher interest rates would cause high-priced stocks like technology companies to be less attractive to investors, and would likely push a greater number of investors into securities like bonds for better returns, which would come at the expense of the stock market.
Job market still lagging
The Fed is also closely monitoring the employment market, which has been improving but is still lagging behind the rest of the economy during the recovery.
"That gives investors some reassurance that the Fed isn't going to move on rates when the economy, from a labor market perspective, isn't back to where it was," Johnson said.
The yield on the 2-year Treasury note, which closely tracks expectations for future Fed moves, rose to 0.27% from 0.23% a day earlier. The yield on the 10-year Treasury fell to 1.46% from 1.51% late Thursday.
Several stocks bucked the broader decline after reporting encouraging news. Software maker Adobe rose 2.6% after giving investors a solid profit forecast and strong second-quarter financial results. Firearm maker Smith & Wesson jumped 17.2% after raising its quarterly dividend and reporting strong fiscal fourth-quarter financial results.