Federal Reserve Chairman Jerome Powell’s hawkish tone toward inflation has been credited with sending the stock market plummeting Wednesday, dashing traders’ hopes that he would tone down the tough talk.
Hopes of a pivot dissipated after the Fed imposed another 0.75 percentage point rate increase Wednesday afternoon, and Powell said in a press conference the fight against inflation is far from done.
“Incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected,” Powell said.
The increase will raise the fed funds rate range from zero-to-0.25 percent in March to 3.75-to-4 percent.
In most cases, higher interest rates mean a declining stock market. Companies borrow less money and their earnings grow at a slower rate than investors anticipate, causing a ripple effect across all sectors of the stock market.
Powell’s willingness to raise interest rates in order to keep inflation under control — even if it means sacrificing economic growth, consumer spending and jobs — makes him, by definition, an inflation hawk.
“The tone of Fed Chair Jay Powell’s comments was quite hawkish, which means the Fed still has a way to go to fight inflation, and the level of interest rates will be higher than previously expected,” said Jack McIntyre, portfolio manager at Brandywine Global. “There were no hints of dovishness to indicate the Fed may be poised to pause.”
The Dow Jones Industrial Average fell 1.55 percent to close at 32,147.76. The S&P 500 dropped 2.5 percent to finish at 3,759.69, and the Nasdaq Composite fell 3.36 percent to settle at 10,524.80 Wednesday.
“Very straightforward pivot here by Powell – he pivoted to MORE hawkish! ha” tweeted Keith McCullough, CEO of Hedgeye Risk Management
The Fed’s rate decision came after Tuesday’s Job Openings and Labor Turnover Survey JOLTS report showed strong jobs data despite aggressive Fed tightening. Better-than-expected private payroll data for October painted a resilient labor market.
Stocks initially rallied Wednesday following the rate hike when an accompanying Fed statement hinted at a possible policy change in the future, CNBC reported. “In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,” the statement read.
The rally was short-lived.
“It is simply remarkable the extent to which the chairman purposely seemed to walk back any possible dovish interpretation of the new language statement. He went out of his way to neutralize it” tweeted Steve Liesman, senior economics reporter for CNBC.