Stocks slumped and bond yields rose Wednesday as Wall Street interpreted the minutes from the Federal Reserve's recent meeting of policymakers as a sign the central bank is poised to move faster to raise interest rates this year as it battles inflation.
The S&P 500 fell 1.9%, its biggest drop since September, as technology companies led a broad market slide. The tech-heavy Nasdaq composite fell 3.3%, its worst decline since February. The Dow Jones Industrial Average fell 1.1%, pulling back from the record high it set a day earlier.
Bond yields moved higher after the minutes from the Fed meeting came out. The yield on the 10-year Treasury note, a benchmark for setting rates on mortgages and many other kinds of loans, rose to 1.70% soon after the minutes were released, from 1.68% just before. It hasn't been at 1.70% since April.
The Fed minutes showed that policymakers at their meeting last month expressed concerns that inflation, which has surged to four-decade highs, was spreading into more areas of the economy and would last longer than they previously expected. The Fed officials also concluded that the U.S. job market was nearly at levels healthy enough that the Fed’s low-interest rate policies were no longer needed.
For both those reasons, Fed Chair Jerome Powell said after the Dec. 14-15 meeting that the central bank was accelerating the reduction of its ultra-low interest rate policies.
Even so, Wall Street appeared to read the minutes as a sign that the central bank will be perhaps more aggressive about rolling back the economic stimulus policies it put in place after the pandemic, which could mean a faster road to higher interest rates.
“We believe the Fed is likely to raise interest rates quicker and potentially shrinking their balance sheet sooner than many expect as they signal fighting inflation is more important than protecting against a drop in economic activity,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.
The S&P 500 fell 92.96 points to 4,700.58. The Dow fell 392.54 points to 36,407.11. The Nasdaq dropped 522.54 points to 15,100.17.
Small-company stocks also posted sizable losses. The Russell 2000 fell 74.87 points, or 3.3%, to 2,194.
The Fed minutes show that policymakers discussed how they may have to raise short-term interest rates at a quicker pace and allow their bond purchases to roll off sooner than they did in past attempts to get interest rates back to normal.
“They noted that current conditions included a stronger economic outlook, higher inflation, and a larger balance sheet and thus could warrant a potentially faster pace of policy rate normalization," according to the minutes.
The message seemed to catch bond investors, in particular, off guard.
“The Fed’s been talking, but the bond market hasn’t been listening,” said Willie Delwiche, investment strategist at All Star Charts. “That started to change this week, and the minutes today echoed what the bond market is starting to reflect this week, and (stocks) are taking notice of that.”
Roughly 80% of stocks in the benchmark S&P 500 fell. Technology companies, which led gains on Monday and then pulled the broader market lower on Tuesday, were the biggest drag on the index. Microsoft fell 3.8% and software maker Adobe shed 7.1%.
A mix of retailers and other companies that rely on consumer spending also lost ground. Tesla slid 5.4% and Amazon fell 1.9%.
AT&T rose 2.2% after giving investors an encouraging update on subscriber growth.
European markets closed mostly higher and Asian markets closed mostly lower overnight.
Investors are dealing with a busy first week of the new year with a wide range of economic data. The latest latest reports on different sectors of the economy and the employment market come as Wall Street continues gauging the potential economic impact of rising inflation and the latest wave of COVID-19 cases.
On Thursday, the Institute for Supply Management will release its service sector index for December, giving Wall Street a better picture of how the economy's largest sector is handling the latest surge of COVID-19 cases from the highly contagious omicron variant.
On Friday, the Labor Department will release its monthly employment report for December.
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