Wall Street gave up all its gains for the month of August, with the Dow plummeting more than 1,000 points Friday, as investors keen for a more modest interest rate path were disappointed by Federal Reserve Chief Jerome Powell signaling the central bank would keep hiking rates to tame inflation.
The US economy will need tight monetary policy “for some time” before inflation is under control, a fact that means slower growth, a weaker job market and “some pain” for households and businesses, Powell said in prepared remarks for a speech to the Jackson Hole central banking conference in Wyoming.
People should not expect the Fed to dial back quickly until the inflation problem is fixed, the central bank chair added.
“The Fed wants to talk tough because they don’t want inflation to become ingrained in the economy,” said Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management Co.
“He focused on not loosening policy too early but he didn’t mention going any further on a hawkish side.”
The Dow Jones Industrial Average nosedived immediately after Powell’s comments, falling 1,008.38 points, or 3% to 32,283.40. The S&P 500 slid 141.46 points, or 3.4%, at 4,057.66, and the Nasdaq Composite fell nearly 500 points points, or 3.9%, to 12,141.71.
The Dow had opened the month at 32,798 and had soared above 34,000 in mid-August.
Weighing on megacap growth and technology stocks, the US two-year Treasury yields briefly popped to their highest levels since October 2007 before stabilizing near two-month highs.
High-growth and technology stocks such as Nvidia and Amazon declined 9.2% and 4.8%, respectively after posting sharp gains in the previous session.
Wall Street has tumbled since the start of this year as investors priced in the expectation of aggressive interest rate hikes and a slowing economy.
However, it has recovered strongly since June, with the S&P 500 regaining nearly half its losses for the year on the back of stronger-than-expected quarterly earnings and hopes that inflation has peaked.
Traders were still divided between a 75-basis-point and a 50-basis-point hike by the Fed, while economists see the central bank lifting rates by 50 points at its meeting next month.
Data earlier showed US consumer spending barely rose in July, but inflation eased considerably, which could give the Fed room to scale back its aggressive interest rate increases.
Dell Technologies fell 14% as it joined rivals in predicting a slowdown as runaway inflation and the darkening economic outlook prompt consumers and businesses to tighten their purse strings.