Stocks fell Friday to extend a streak of volatile trading following the Federal Reserve’s latest monetary policy decision and projections.
The Dow sold off sharply, sinking by 1.6%, or more than 500 points, to close out a fifth straight session of declines. The index fell more than 3% on the week in its worst weekly performance since October. The S&P 500 extended losses to close lower by 1.3%, while the Nasdaq fell 0.9%.
Treasury yields pared some recent gains, and the benchmark 10-year yield dipped. Traders piled back into government bonds Thursday and Friday morning after selling immediately following the Federal Reserve’s monetary policy decision and updated projections on Wednesday, which suggested two interest rate hikes could take place by year-end 2023.
The benchmark U.S. 10-year Treasury (^TNX) rose by as much as 10 basis points to 1.59% mid-week before tumbling below 1.5% Friday morning.
The Fed’s projections this week suggested a more hawkish tilt to monetary policy than many market participants had anticipated for the coming years, with the Fed signaling it would eventually ease up some of its highly accommodative monetary policy support even with the economy not yet fully recovered from the pandemic at present. Comments from St. Louis Federal Reserve President James Bullard, who had previously tended to fall on the more dovish side of the Fed policy spectrum, also added to markets’ perceptions of a more aggressive central bank. Bullard said he saw a potential for an interest rate increase as soon as next year.
“I think it’s natural that we’ve tilted a little bit more hawkish here to contain inflationary pressures,” Bullard said in a CNBC interview, noting recent improvements in the economy.
Thursday’s weekly jobless claims report from the Labor Department showed an unexpected increase in initial unemployment filings, underscoring the still-choppy recovery taking place across the U.S.
“The labor market remains constrained by supply shortages that are outstripping demand and preventing a stronger recovery,” Rubeela Farooqi, chief U.S. economist for High Frequency Economics, said in a note Thursday. “However, we expect further strengthening ahead as the economy continues to rebalance.”
“That was also the message from Fed Chair Powell in his press briefing on Wednesday,” Farooqi added. “He expects a strengthening labor market and continued job creation as constraints on supply ease over the summer months and into the fall.”
Still, a string of hotter-than-expected prints on inflation, as well as myriad anecdotes about supply chain disruptions and rising prices for producers and consumers, have also made the case for some tightening of policy, many pundits noted. Stocks could see some choppiness in the near-term as investors continue to appraise monetary policymakers’ next moves.
“With the way inflation has been coming in of late, it makes perfect sense that some people giving their dot plots would expect some increases in rates earlier than before,” Tim Johnson, BNP Paribas Asset Management head of global multi-sector fixed Income, told Yahoo Finance. “So I’m not surprised, and I think the market has been really complacent and comfortable with the backstop of the Fed for a long time. We’re in a transition phase now and there’s going to be a little bit of turbulence.”
Others offered a similar take.
“The market thought the Fed was going to be behind the curve when it comes to keeping inflation in check,” Shawn Cruz, TD Ameritrade’s Trader Services senior manager, told Yahoo Finance. “By the Fed at least now acknowledging that there are going to be some inflationary pressures, they are going to have to tighten policy, I the market now has a little bit more faith in the Fed to keep inflation under control.”
Source: yahoo finance