Dow drops almost 1,100 points as investors digest Fed interest rate hike

Stocks plummeted on Wall Street on Thursday, erasing a rally from a day earlier, as markets assess the fallout from the Federal Reserve’s stepped-up fight against inflation.

The Dow Jones Industrial Average fell 1,063 points, or 3.1%, to close at 32,997. The S&P 500 fell 3.6%, closing at 4,146, with more than 95% of companies listed on the benchmark index in the red. The tech-heavy Nasdaq fell even more sharply, closing almost 5% lower.

It was the second-worst day for the S&P 500 since June 2020, and the worst day for the Nasdaq since that month, according to FactSet.

Markets rallied a day earlier after the Fed on Wednesday said it wouldn’t move as quickly as some had feared to hike interest rates. But traders are starting to fret more about the impact of the Fed’s moves to dampen demand for borrowing money as it tries to cool surging inflation.

“The Fed is between a rock and a hard place, and because of instant information investors are experiencing both fear and greed at the exact same moment,” said Sam Stovall, chief investment strategist at CFRA.

Bond yields resumed their upward march, which will send mortgage rates higher. The yield on the 10-year Treasury rose sharply, to 3.1%, reaching its highest levels since late 2018.

Technology companies had some of the biggest losses and weighed down the broader market, in a reversal from the solid gains they made a day earlier. Internet retail giant Amazon slumped 8.1% and Google’s parent company, Alphabet, fell 5.4%. Etsy fell 17.7% after giving a weak forecast.

Twitter rose 3% after Tesla CEO Elon Musk said he had secured more backing for his bid to take over the company.

The Fed’s aggressive shift to raise interest rates has investors worrying about whether it can pull off a tricky balancing act — slowing the economy enough to halt high inflation but not so much as to cause a downturn. A recent survey from AllianzLife found that six in 10 respondents were concerned that a major recession is “around the corner.”

“Concerns focus on whether the Fed will have to become even more hawkish to bring demand down – and that would involve slowing the economy more than they now project,” Quincy Krosby, chief equity strategist for LPL Financial, said in an email.

Yet for now, most Wall Street economists think the U.S. will steer clear of a recession this year, pointing to solid job growth, heathy consumer spending and robust corporate earnings.

Markets steadied this week ahead of the policy update, but Wall Street was concerned the Fed might elect to raise rates by three-quarters of a percentage point in the months ahead. Fed Chair Jerome Powell eased those concerns, saying the central bank is “not actively considering” such an increase.

The central bank also announced it will start reducing its huge $9 trillion balance sheet, which consists mainly of Treasury and mortgage bonds, starting June 1.

When Powell said the Fed wasn’t considering a mammoth increase in short-term rates, that sent a signal to investors to send stock prices soaring and bond yields tumbling. A slower pace of interest-rate hikes would mean less risk of the economy tipping into recession, as well as less downward pressure on prices for all kinds of investments.

But diminishing the odds of a 0.75% hike doesn’t mean the Fed is done raising rates steadily and sharply as it fights to tame inflation. Economists at BNP Paribas still expect the Fed to keep hiking the federal funds rate until it reaches a range of 3% to 3.25%, up from zero to 0.25% earlier this year.

“We do not think this was Chair Powell’s intention,” economists at BNP Paribas wrote in a report, citing the market’s jubilance on Wednesday, “and we reckon we could see coming ‘Fedspeak’ seek to re-tighten financial conditions.”