Wall Street slumps as Powell flags sharper rate hikes


By Sinéad Carew and Sruthi Shankar

(Reuters) – U.S. stock indexes closed sharply lower on Tuesday after Federal Reserve Chair Jerome Powell told Congress the central bank will likely need to raise interest rates more than expected as it seeks to rein in stubbornly high inflation.

Powell sent investors fleeing after he told U.S. lawmakers earlier in the day that the Fed is prepared to hike rates in larger steps if economic data suggests tougher measures are needed to control rising prices.

The remarks were his first since data showed inflation unexpectedly jumped in January and the U.S. government reported an unusually large increase in payroll jobs for the month.

Traders dramatically raised their bets for a 50-basis-point rate hike in March after Powell’s comments, with money market futures pricing a more than 65% chance of such a move, up from around 31% on Monday, according to CME Group’s FedWatch tool.


The idea of higher rates for longer is a “headwind” and “hearing it directly from Powell is a little different to inferring it from the data,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance.

“From a risk-rewards standpoint investors have to recalculate their desire to be invested with this new paradigm,” said Adam Sarhan, chief executive of 50 Park Investments, based in Orlando, Florida. “It’s the realization the Fed is going to err on the side of being more hawkish.”

Graphic: Odds surge for larger Fed rate hike in March https://www.reuters.com/graphics/USA-RATES/FEDWATCH/egpbyowyqvq/chart.png

According to preliminary data, the S&P 500 lost 61.93 points, or 1.53%, to end at 3,986.71 points, while the Nasdaq Composite lost 144.33 points, or 1.24%, to 11,531.40. The Dow Jones Industrial Average fell 573.13 points, or 1.71%, to 32,858.31.

Powell, who will testify again on Wednesday before the House of Representatives Financial Services Committee, also added that the Fed would not consider changing its 2% inflation target and the job market does not suggest an economic downturn was close.

Data influencing the Fed’s rate hiking path includes Friday’s non-farm payroll numbers. Economists polled by Reuters are expecting an increase of 200,000 jobs in February, compared with the much stronger-than-expected 517,000 jobs reported in January.

While traders were flipping bets in favor of a 50 basis point rate hike this month, Scott Ladner, chief investment officer at Horizon Investments, said the size of the hike depends on the upcoming payrolls data and inflation numbers.

But John Lynch, chief investment officer for Comerica Wealth Management, argued that with employment and consumption showing strength so far, investors should have been expecting Powell’s more hawkish tone.

Meanwhile, the yield on two-year Treasury notes, which best reflects short-term rate expectations, hit 5% for the first time since July 2007. [US/]

Rising bond yields tend to weigh on equity valuations, particularly those of growth and technology stocks, as higher rates reduce the value of future cash flows.

Big individual stock moves included a sharp decline for Rivian Automotive after the electric automaker unveiled plans to sell bonds worth $1.3 billion.

Dick’s Sporting Goods rallied after the retailer forecast annual earnings above Wall Street estimates and more than doubled its quarterly dividend.

(Reporting by Sinéad Carew in New York, Sruthi Shankar and Bansari Mayur Kamdar in Bengaluru, graphic by Noel Randewich in San Francisco, additional reporting by Ankika Biswas by Shristi Achar A; Editing by Vinay Dwivedi and Richard Chang)