US equities fall as the Fed signals it will remain aggressive

Stocks tumbled on Wall Street and European markets on Thursday as investors grew increasingly concerned that the Federal Reserve and other central banks are willing to risk a recession to bring inflation under control.

The S&P 500 fell 2.5%, with more than 90% of stocks in the reference index closing in the red. The Dow Jones Industrial Average fell 2.2% and the Nasdaq composite lost 3.2%. The wide slide erased all weekly gains for major indices.

European equities fell sharply, with the German DAX falling 3.3%.

The wave of selling came as central banks in Europe hiked rates a day after the US Federal Reserve raised its key rate again, emphasizing that interest rates will have to go higher than previously expected to curb inflation.

It is this coordinated tightening by the central bank that is not doing well in that environment, said Willie Delwiche, investment strategist at All Star Charts.

In the US, market losses were widespread, even though technology stocks held the largest weight on the S&P 500. The reference index fell by 99.57 points to 3,895.75.

The Dow Jones fell 764.13 points to 33,202.22, while the tech-heavy Nasdaq fell 360.36 points to 10,810.53.

Small company shares also fell. The Russell 2000 index fell 45.85 points, or 2.5%, to close at 1,774.61.

The Fed raised short-term interest rates by half a percentage point on Wednesday, the seventh increase this year. The central banks in Europe followed suit on Thursday, together with the European Central BankBank of England and the Swiss National Bank each raise their key lending rates by half a point on Thursday.

While the Fed is slowing the pace of its rate hikes, the central bank indicated it expects rates to be higher in the coming years than anticipated. That disappointed investors hoping for recent signs of inflation easing might convince the Fed to ease some of the pressure on the US economy.

The federal funds rate is between 4.25% and 4.5%, the highest level in 15 years. Fed policymakers predict that central bank interest rates will reach a range of 5% to 5.25% by the end of 2023. Their forecast does not call for a rate cut before 2024.

The yield on the two-year Treasury, which closely tracks expectations for Fed moves, rose to 4.24% from 4.21% late Wednesday. The yield on the 10-year Treasury, which affects mortgage ratesdecreased from 3.48% to 3.45%.

The yield on three-month Treasuries fell to 4.31%, but remains above that of 10-year Treasuries. That is known as an inversion and is considered a strong warning that the economy is headed for a recession.

The (stock)markets’ response is now factoring in a recession and rejecting the possibility of the soft/soft landing that Fed Chairman Jerome Powell raised in a speech last month, said Quincy Krosby, chief global strategist for LPL Financial.

The prospect of more rate hikes from the Fed has increased Wall Street’s concerns about how corporate earnings might fare in a recession, Delwiche said.

(Inflation) has peaked, it will peak, it has peaked, whatever, that’s not the story, he said. The story now is how is the economy holding up? How is the income holding up?

The central bank has fought to lower inflation at the same time, parts of the economy, including employment and consumer spending, remain strong. That has made it more difficult to rein in high prices for everything from food to clothing.

On Thursday, the government reported that the number of Americans filing for unemployment benefits fell last week, a sign that the labor market remains strong. Meanwhile, another report showed that retail sales fell in November. This decline followed a sharp rise in spending in October.

Like the Fed, central bank officials in Europe said inflation is not yet under control and more rate hikes are coming.

We have a long game ahead of us, Christine Lagarde, president of the European Central Bank, said at a press conference.

Elaine Kurtenbach and Matt Ott contributed to this report.