By Stephen Culp
NEW YORK (Reuters) – Wall Street stocks plunged, the greenback surged and Treasury yields dipped on Tuesday as Federal Reserve Chairman Jerome Powell concluded the first day of his semi-annual, two-day monetary policy testimonial before Congress.
All three major U.S. stock indexes headed decisively lower following Powell’s prepared remarks, and continued to bounce along the bottom as the head of the central bank responded to questions from the Senate Banking Committee.
In a broadly risk-off session, the dollar gained strength and inversion between short- and long-dated Treasury yields touched their widest since 1981 as the testimony reaffirmed the Fed’s determination to bring inflation down to its 2% target rate.
“It’s a pretty classic risk-off day,” said Ross Mayfield, investment strategy analyst at Baird in Louisville, Kentucky. “The combination of (Chairman Powell) saying that the pace of rate hikes could accelerated and that the terminal rate would probably have to be adjusted upward was enough to send risk assets tumbling.”
In his testimony, Powell confirmed that a recent spate of generally robust economic data, particularly in the labor market, along with stubbornly slow inflationary cool-down, increases the likelihood that the Fed will raise its policy rate more aggressively.
At last glance, financial markets have priced in a 66.1% chance of a 50 basis point increase to the fed funds target rate at the conclusion of the central bank’s March meeting, according to CME’s FedWatch tool.
Graphic: Odds surge for larger rate hike in March https://www.reuters.com/graphics/USA-RATES/FEDWATCH/egpbyowyqvq/chart.png
The Dow Jones Industrial Average fell 558.35 points, or 1.67%, to 32,873.09, the S&P 500 lost 62.65 points, or 1.55%, to 3,985.77 and the Nasdaq Composite dropped 140.20 points, or 1.2%, to 11,535.54.
European shares extended their losses after Powell’s prepared remarks fueled rate hike worries.
“The world is concerned that the Fed hikes rates so much and so long that the U.S. could head into recession,” said Tim Ghriskey, senior portfolio strategist Ingalls & Snyder in New York.
The pan-European STOXX 600 index lost 0.77% and MSCI’s gauge of stocks across the globe shed 1.47%.
Emerging market stocks lost 0.89%. MSCI’s broadest index of Asia-Pacific shares outside Japan closed 0.83% lower, while Japan’s Nikkei rose 0.25%.
Benchmark Treasury yields dipped after Powell’s remarks, and the inversion between 2-year and 10-year Treasury yields, a harbinger of potential recession, hit its steepest differential in over four decades.
Benchmark 10-year notes last rose 2/32 in price to yield 3.9754%, from 3.983% late on Monday.
The 30-year bond last rose 15/32 in price to yield 3.884%, from 3.912% late on Monday.
The greenback gained ground, hitting its highest level since early January against a basket of world currencies as Powell indicated the Fed could ramp up its efforts to rein in inflation.
The dollar index rose 1.22%, with the euro down 1.19% to $1.0551.
The Japanese yen weakened 0.87% versus the greenback at 137.13 per dollar, while sterling was last trading at $1.1829, down 1.60% on the day.
Oil prices extended their losses, falling more than 3% on the strengthening dollar and worries over dampening demand.
U.S. crude fell 3.58% to settle at $77.58 per barrel and Brent settled at $83.29, down 3.35% on the day.
Gold plunged in opposition to the rising dollar.
Spot gold dropped 1.8% to $1,813.64 an ounce.
(Reporting by Stephen Culp Additional reporting by Amanda Cooper in London; Editing by Mark Potter and Chizu Nomiyama)