Rate worries hit Wall Street
US stocks slumped on Wednesday on speculation that the Federal Reserve may lift interest rates this year to keep a lid on inflation. Higher rates can tap the brakes on accelerating prices at cash registers, but they also slow the economy and hurt prices for investments.
The S&P 500 dropped 1.2% and erased an earlier, modest gain after the Fed released projections showing that nine of 18 its policymakers foresee at least one increase to its main interest rate this year. The Dow Jones Industrial Average went from a gain of 280 points in the morning to a drop of 507 points, or 1%, while the Nasdaq composite sank 1.3%.
Warsh changes the tone
One important policymaker at the Fed did not give a forecast for where the federal funds rate may end 2026: Chairman Kevin Warsh. In his first press conference as head of the US central bank, Warsh said he'd also be considering a revamp of how the Fed communicates with financial markets and US households and businesses.
One of his first moves was to end the inclusion of hints in Fed statements about where interest rates may be heading in the future, something called "forward guidance."
Warsh said he wants Wall Street to react to incoming reports about inflation, the job market and other economic data based on how they should affect prices for stocks, bonds and other investments rather than how traders expect the Federal Reserve to react to them.
As part of that, Warsh said the Fed could make changes to its usual release of projections every three months showing where Fed officials foresee interest rates, the economy and inflation heading.
For now, Wall Street reacted uneasily to Fed officials' latest set of projections, though Warsh cautioned he "didn't hear tons of conviction" behind them. Stocks zigzagged up and down several times following the release. The Fed also announced its decision to keep the federal funds rate steady at this meeting, as it has all year so far.
Bond yields climb
In the bond market, US Treasury yields climbed. The yield on the 10-year Treasury, which influences rates for mortgages and other loans going to US households and businesses, rose to 4.49% from 4.43% late on Tuesday. The two-year Treasury yield, which more closely tracks expectations for Fed action, jumped to 4.21% from 4.05%.
Traders upped their bets for at least one increase to the federal funds rate this year and now see an 84% probability of it, up from 59.5% a day earlier, according to data from CME Group.
High yields in bond markets worldwide caused by worries about inflation have already been threatening to slow economies and undercut prices for all kinds of investments.
Tech stocks weigh
In the stock market, SpaceX erased an early gain and fell 4.9% for its first loss since its super-hyped debut on the US stock market last week.
Drops of 3.8% for Microsoft, 3.5% for Amazon and 1.3% for Nvidia were three of the heaviest weights on the S&P 500.
All told, the S&P 500 fell 91.25 points to 7,420.10. The Dow Jones Industrial Average dropped 507.12 to 51,492.55, and the Nasdaq composite sank 354.69 to 26,021.66.
Consumer spending lifts
A report released on Wednesday said retailers across America saw their revenue grow at a faster pace in May than economists expected, offering hope that solid spending by consumers can support the economy. But high inflation has also made US shoppers feel more discouraged about their finances.
Oil prices were steadier on Wednesday following slides earlier in the week on optimism about the tentative US-Iran deal to get the global flow of oil going again. Iran is set to take steps to reopen the Strait of Hormuz once the deal is signed, which would allow oil tankers to deliver crude from the Persian Gulf again and hopefully take pressure off inflation.
The price for a barrel of Brent crude oil rose 0.7% to $US79.55. It's still above its roughly $US70 price from before the war, but it's well below its $US100-plus price from a few weeks ago.
The Associated Press
