U.S. stocks fell on Thursday as investors weighed the potential economic costs of the Federal Reserve’s ongoing fight against inflation.
The S&P 500 fell more than 3.4% before reversing some losses, and the index hit its worst intraday level of the year. It also erased gains after rising 1.5% on Wednesday. The Nasdaq Composite plunged 4%, sending the index down as much as 32% on an intraday basis since the start of the year. The Dow fell more than 800 points, or 2.6%, and the 10-year Treasury yield fell to around 3.34%.
Stocks, which initially trended higher after the Fed’s first 75 basis point rate hike since 1994 on Wednesday, turned as traders weighed the possibility that the central bank’s measures to reduce the inflation trigger a deeper slowdown in economic activity.
The Federal Open Market Committee (FOMC) Summary of Economic Projections (SEP) showed on Thursday that the committee itself now sees a less rosy economy ahead as its interest rates continue to climb. The FOMC now forecasts that the unemployment rate will reach 3.7% by the end of this year (from 3.5% in March) and that real gross domestic product will only increase by 1.7% (from 2 .8% seen previously) . The Fed also raised its forecast for the underlying inflation rate at the end of the year and its expectation for the end of 2022 for the federal funds rate.
The lower growth outlook coupled with a more aggressive path for future interest rate hikes appeared to justify some pundits’ concerns that the Fed’s window to achieve a “soft landing” had nearly or already passed. Fed Chairman Jerome Powell suggested on Wednesday that an interest rate hike of 50 or 75 basis points most closely resembles the next central bank meeting in July. While the Fed still expects GDP growth to end each of 2022, 2023 and 2024 in positive territory, some have suggested that may be overly optimistic.
“The Summary of Economic Projections (SEP) and Chairman Powell’s presser have highlighted a committee that sees an increasingly narrow path to a soft landing, while holding it as a benchmark,” wrote economist Matthew Luzzetti. Chief American at Deutsche Bank, in a memo. . “The statement removed reference to maintaining a strong labor market as inflation is subdued and the SEP forecasts that the unemployment rate will eventually rise by around half a percentage point. We continue to forecast that the Fed will have to act more aggressively than signaled to [Wednesday’s] meeting and that this tightening will trigger a recession in 2023 which will lead to a larger increase in the unemployment rate. »
Powell, for his part, said Wednesday that the Fed was not looking for a recession to meet the central bank’s goals of lowering inflation. However, whether such an outcome is ultimately avoidable as a byproduct of the Fed’s actions remains a question for markets, and one that will likely keep volatility in play, some strategists said.
“‘Clear and compelling’ evidence of an inflation moderation has yet to materialize…Further volatility is likely as the Fed is staunchly dependent on data,” said Julian Emanuel, Evercore’s senior managing director, in a note. “Ideally this will include actions reflecting signs of surrender, the groundwork for ‘a bottom’ is being laid.”
“Until necessary and sufficient signs (turning gas prices and VIX [spikes above 40] on a large volume of stock) of ‘a’ low, not necessarily ‘the’ low appears, we maintain balanced exposure,” he added.
Twitter (TWTR) shares held slightly higher on Thursday morning, bucking the broader market trend ahead of Elon Musk’s much-anticipated meeting with employees of the social media company later in the day. Details of the meeting will be closely watched over whether Musk intends to move forward with the deal to acquire the company at its previously discussed $44 billion price tag.
Robin Hood (HOOD) stocks were poised to fall again on Thursday amid the recent drop in cryptocurrency prices, and as Wall Street firms took an increasingly pessimistic tone on shares of the online trading platform due to heightened regulatory concerns. Atlantic Equities downgraded the stock from neutral to underweight on Wednesday and cut its price target to the Wall Street low of $5 per share, according to Bloomberg data.
Adobe (ADBE) Shares fell ahead of the company’s fiscal second-quarter earnings report, which is expected to be released Thursday after the market close. Consensus analysts see the software company generating adjusted earnings of $3.31 per share on revenue of $4.35 billion.
Beyond Meat (BYND) Shares gave up gains on Thursday after climbing 14% a day earlier amid a rebound in broader markets and after the company announced an expansion in the availability of its outlets. Shares of Beyond were down more than 3% in early trading.
This post will be updated.
Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter.
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