Stocks closed lower and bond yields rose on Wall Street on Wednesday after details from last month’s meeting of Federal Reserve policymakers showed the central bank intends to be aggressive in its efforts to fight against inflation.
The S&P 500 fell 1%, adding to its losses the day before. The Dow Jones Industrial Average fell 0.4% and the Nasdaq 2.2%.
Minutes from the meeting three weeks ago show that Fed policymakers agreed to start reducing the stockpile of central bank Treasuries and mortgage-backed securities by about $95 billion. dollars per month, starting in May. That’s more than some investors expected and nearly double the pace the last time the Fed shrunk its balance sheet.
At the meeting, the Fed raised its benchmark short-term rate by a quarter of a percentage point, the first increase in three years. The minutes showed that many Fed officials wanted to raise rates by an even larger margin last month, and they still saw “one or more” such oversized increases potentially coming in future meetings.
“Essentially, the Fed has concluded that a good offense is the best defense,” said Sam Stovall, chief investment strategist at CFRA. “We’re likely to see not only higher short-term interest rates as a result of the Fed’s actions, but also higher long-term rates, which should put pressure on potential (equity) gains. “
Higher rates tend to lower the price-to-earnings ratio of stocks, a key valuation barometer. Such a scenario can particularly hurt stocks considered to be the most expensive, including big tech companies. That explains why tech stocks were the biggest drag on the benchmark S&P 500 on Wednesday. Apple fell 1.8% and Microsoft 3.7%.
Communications companies, retailers and others that rely on direct consumer spending also weighed heavily on the index. Amazon fell 3.2% and Facebook parent company Meta fell 3.7%.
The S&P 500 ended down 43.97 points at 4,481.15. The Dow Jones slid 144.67 points to 34,496.51, and the tech-heavy Nasdaq fell 315.35 points to 13,888.82.
Shares of smaller companies also fell, sending the Russell 2000 Index down 29.11 points, or 1.4%, to 2,016.94.
Investors focus on Fed policy as the central bank moves to reverse low interest rates and the extraordinary support it began providing the economy two years ago when the pandemic hit. plunged the economy into a recession.
The Fed’s proposed timeline for allowing billions of bonds and mortgage-backed securities to roll off its balance sheet was hinted at in remarks Tuesday by Fed Governor Lael Brainard, who said the process could start as early as May and proceed at a rapid pace.
Rapidly shrinking the Fed’s balance sheet would help drive longer-term rates higher, but would also contribute to higher borrowing costs for consumers and businesses.
“The reality is that we are in uncharted waters here and the Fed has a tough job unwinding the huge monetary support over the past two years,” said Charlie Ripley, senior investment strategist at Allianz Investment Management. “Against this backdrop, it is entirely conceivable that uncertainty over the path of monetary policy will remain entrenched in markets and that is exactly what we are seeing with the recent moves in interest rates and assets to risk.”
The 10-year Treasury yield rose to 2.61% after the release of the minutes. It was at 2.59% earlier in the day, compared to 2.54% on Tuesday evening. The yield, which is used to set interest rates on mortgages and many other types of loans, is the highest in three years.
Traders are now pricing in a nearly 77% chance that the Fed will raise its key interest rate by half a percentage point at its next meeting in May. That’s double the usual amount and something the Fed hasn’t done since 2000.
“Even though we were aware of the upcoming rate hikes, it’s been quite challenging for long-term equity managers across the board,” said William Huston, chief investment officer at Bay Street Capital Holdings.
Inflation is at its highest level in four decades and threatens to dampen economic growth. Rising prices for everything from food to clothes have raised fears that consumers may end up cutting back on spending. Russia’s invasion of Ukraine added to these concerns, pushing energy and commodity prices, including wheat, even higher.
Benchmark crude oil prices in the United States fell 5.6% on Wednesday, but are more than 30% higher for the year. This pushed gasoline prices higher, putting more stress on shipping costs, commodity prices and consumer wallets.
Treasury Secretary Janet Yellen warned a House panel on Wednesday that the dispute would have “huge economic repercussions in Ukraine and beyond.”
The conflict in Ukraine continued to cause financial pressures against Russia. The White House has said Western governments will ban further investment in Russia following evidence that its soldiers deliberately killed civilians in Ukraine. The US Treasury has said President Vladimir Putin’s government will be prevented from paying the dollar debts of US financial institutions, potentially increasing the risk of default.
European governments have resisted calls to boycott Russian gas, Putin’s biggest source of export revenue, because of the possible impact on their economies.
Wednesday ended up being a pretty quiet day for corporate news ahead of the latest round of corporate earnings reports. JetBlue Airways fell 8.7% after it offered to buy rival airline Spirit for $3.6 billion and scrap a plan to merge Spirit with Frontier Airlines. The spirit fell 2.4%.