U.S. stocks suffered a sharp decline on Tuesday as investors weigh how aggressively the Federal Reserve will move to tighten its monetary policy to limit inflation.
The Dow Jones Industrial Average plummeted by 550 points, or more than 1.5%, as the central bank inches closer to raising the federal funds rate for the first time since 2018. The Nasdaq, which includes a lot of tech companies, dropped by nearly 2% on Tuesday after the long holiday weekend.
The markets are now expecting the Fed to hike interest rates more times than they were at the end of last year. Coming out of the central bank’s December meeting, officials indicated that rates might be increased three times this year. Interest rate futures markets now indicate that there could be four or five rate hikes in 2022, up from investors’ expectations of three to four just days ago.
“Markets are still trying to find a level for rate increases. It was only in October the market was expecting one rate hike for 2022 and now it’s expecting four,” Edward Park, chief investment officer at Brooks Macdonald, told the Wall Street Journal. “That’s reflecting the level of uncertainty we have in the market right now about the path of Fed policy.”
WHAT TO EXPECT WHEN THE FEDERAL RESERVE HIKES INTEREST RATES
Another factor pushing the markets downward on Tuesday was an earnings report from financial services giant Goldman Sachs that fell below expectations. The firm said quarterly profit fell 13% from a year earlier to $3.94 billion. Goldman’s stock plummeted by about 8% in reaction to the news.
Last week, both Fed Chairman Jerome Powell and Fed Board Member Lael Brainard, President Joe Biden’s pick for vice chairwoman, testified before Congress. They consistently messaged that inflation is the central bank’s No. 1 concern right now and that moving the federal funds rate upward is the tool they will use to drive down prices. The first rate hike could come as early as March.
“Our policy has been adapting to this for some months, but … if inflation is going to last longer, then that would potentially imply more risk of its persistence and ultimately becoming entrenched, and our policy will respond accordingly,” Powell told lawmakers, adding that he predicts high inflation will likely persist at least through the middle of this year.
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Consumer prices increased 7% in the year ending in December, the fastest pace since 1982, according to a report released by the Bureau of Labor Statistics this month. Inflation has far exceeded central bank expectations, with the Fed predicting early last year much lower growth.
The last time the Fed raised interest rates was in 2018, after which it began incrementally lowering them. The central bank dropped the target for the federal funds rate to near-zero at the outset of the COVID-19 pandemic in 2020, and it has remained there since.
