The New York Stock Exchange was hit hard on Tuesday by comments from the chairman of the US central bank (Fed) suggesting that the institution’s rates might go higher than expected so far, rekindling fears of a recession.
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The Dow Jones plunged 1.72%, the Nasdaq 1.25% and the broader S&P 500 index 1.53%.
Fed chief Jerome Powell pointed out that the Fed’s main interest rate, which has been climbing for a year to control inflation, might rise at a faster rate than expected and go beyond the level at which the officials of the institution saw it so far stop, or 5.1%.
And rates might stay high “for a while,” he warned before a Senate committee.
Markets are now mostly expecting a rate hike, currently between 4.50% and 4.75%, of 50 basis points at the next meeting of the Fed’s Monetary Policy Committee on March 21-22.
However, a more aggressive Fed on rates, which increases the cost of credit for households and businesses, also increases the risk of recession, which would have an impact on corporate profits.
The New York Stock Exchange indices immediately took a nosedive.
Following Fed rate expectations, the interest rate on 2-year US government bonds jumped to its highest level since 2007, above the 5% threshold.
The 10-year rate also tightened, briefly going back above the 4% threshold.
This has further accentuated the phenomenon known as the inversion of the yield curve, which means that short-term rates are higher than long-term rates, and which is often considered to be a harbinger of an economic recession.
The gap between the US two-year rate and the ten-year rate hasn’t been this wide since 1981.
Quincy Krosby, of LPL Financial, is a little surprised, however, by the reaction of the markets.
“Jerome Powell has only maintained the line he has set, which is that the Fed will do what it has to do to restore price stability,” she said.
“There are probably times when the market tends not to believe it or to think that the return to price stability will happen faster,” she said.
But Jerome Powell “repeats at will that the policy of the Fed depends on the indicators” and the latest inflation figures show that work remains to be done, added the specialist.
Ahead of the Fed’s next meeting, two other major inflation reports will be released as well as the much-awaited February jobs report.
In this context, banking stocks were particularly shaken: JPMorgan lost 2.93%, Bank of America 3.20%, Wells Fargo 4.68% and Citi 2.11%.
Among the other values of the day, the airline JetBlue dropped 2.86% following the formalization of a complaint filed by the Ministry of Justice to block the takeover of its rival Spirit (+4.71%) on the grounds that approximation would lead to higher prices for passengers.
The other major airlines rose in stride, with American taking 1.49%, Delta 1.59% and United 2.99%.
Electric pickup maker Rivian, struggling to ramp up production, fell 14.54% following announcing plans to put $1.3 billion worth of bonds on the market.
WW International, which offers Weight Watchers slimming diets, soared 79.07% following announcing the acquisition of the company Sequence, which sells online consultations with weight management specialists.
