Stocks dove on Thursday, giving up gains from their best day since 2020 in a swing that highlights Wall Street’s uncertainty about what the Federal Reserve’s campaign to slow inflation could mean for the economy.
The S&P 500 fell as much as 3.7 percent, following a gain of 3 percent on Wednesday. Yields on government bonds spiked, with the rate on 10-year U.S. Treasury notes, a benchmark for borrowing costs, climbing above 3 percent and touching its highest level since 2018.
Swings in the stock market have become amplified lately, as investors worry that a combination of inflation and fast-rising interest rates could hit consumer spending, corporate profits and — ultimately — economic growth.
On Wednesday, the Fed raised its benchmark rate by half a percentage point. That decision was widely expected by investors, and after the Fed chair, Jerome H. Powell, said in a news conference that policymakers weren’t considering making even larger increases — specifically ruling out a 0.75 percentage-point jump at a future meeting — the S&P 500 soared.
The Fed is quickly withdrawing support for the economy, to dampen demand and help cool off price gains that are now at their fastest in over four decades. But the central bank has also acknowledged that some factors behind rising prices are out of its reach, namely Russia’s invasion of Ukraine, which has pushed energy prices higher, and China’s recent Covid lockdown, which could further disrupt an already unsteady supply chain.
Understand Inflation in the U.S.
Thursday’s drop was an acknowledgment from investors that, even though the Fed might not go as far as raising rates by three-quarters of a percent in one day, it is still moving aggressively. The central bank also plans to shrink its nearly $9 trillion bond holdings, a move that could directly affect financial markets.
“Markets are now reverting back to expectations for financial conditions that existed prior to yesterday’s press conference,” said Scott Knapp, the chief market strategist at CUNA Mutual Group. “Investors have watched the Fed move from its theory that inflation would be transitory to one of considerable concern about its potential duration and toll on the economy.”
That shift in tone from Fed officials triggered a dive in the S&P 500 in April, with the index tumbling 8.8 percent for the month. And Mr. Powell acknowledged the risks to the economy on Wednesday, saying that lowering inflation without causing a recession would be difficult: “I do expect that this will be very challenging; it’s not going to be easy.”
Technology stocks, which have been particularly susceptible to selling as investors rethink their willingness to own risky investments, were sharply lower on Thursday. Meta, Facebook’s parent company, fell 6 percent, and Amazon dropped more than 7 percent. Apple, Microsoft and Alphabet, Google’s parent company, were also lower.
Many companies have pinned rising prices on rising labor costs, and economists worry that high inflation may become more permanent if wages continue to rise quickly. Fresh data released on Thursday showed just how much those costs are rising, with weaker productivity and stronger compensation leading to an 11.6 percent increase in unit labor costs, the Labor Department reported.
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.
“Today’s data was startling and very inflationary, suggesting that the good intentions communicated yesterday are unlikely to be realized,” said Mr. Knapp.
Thursday’s retreat comes ahead of a pair of widely watched updates on the economy. The Labor Department will publish its monthly report on jobs on Friday, which could give a better indication of how tight the labor market is in the U.S.
Last month, Mr. Powell indicated that the labor market was “unsustainably hot,” fueling worry that the Fed would ramp up its effort to raise rates.
The government will also release its latest update of the Consumer Price Index next week. In March, that measure of inflation rose 8.5 percent, its fastest 12-month pace since 1981, as a surge in gasoline prices tied to Russia’s invasion of Ukraine added to increases coming from the collision of strong demand.