Stocks fall as Fed chair says rates to remain high ‘for some time’

Stocks are falling in a frenetic Friday after the head of the Federal Reserve pushed back on Wall Street’s hopes that it may let off the brakes for the economy.

The S&P 500 was 1.5% lower after Jerome Powell said the Fed will need to keep interest rates high enough to slow the economy “for some time” in order to declare victory over the high inflation sweeping the country. Shorter-term Treasury yields climbed as traders built up bets for the Fed to stay aggressive about its rate hikes.

The Dow Jones Industrial Average was down 404 points, or 1.2%, at 32,887, as of 10:54 a.m., and the Nasdaq composite was 1.9% lower. Indexes went on a round trip to get there as investors struggled to make out the meaning of Powell’s speech. Stocks initially fell, then erased nearly all the losses and then turned lower again.

Powell’s highly anticipated speech followed up on several other Fed officials, who have been pushing back on speculation the Fed may ease up on its interest-rate hikes. The increases help corral inflation but also hurt the economy and investment prices.

Powell acknowledged the rate hikes will hurt the job market and U.S. households, in perhaps an unspoken nod to the potential of the increases causing a recession. But he also said the pain would be worse if inflation were allowed to fester and that “we must keep at it until the job is done.”

He was speaking at an annual economic symposium in Jackson Hole, Wyoming, which has been the setting for market-moving Fed speeches in the past.

“He basically said there will be pain and that they won’t stop and can’t stop hiking until inflation moves a lot lower,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments. “It was a mercifully short speech and to the point. Powell didn’t really break new ground, which is good since Jackson Hole isn’t a policy meeting.”

Expectations had built through the week that Powell would try to to bat down recent talk about a “pivot” by the Fed. Such speculation had helped stocks surge through the summer. Some investors were even saying the Fed could cut interest rates later in 2023, as pressures on the economy mount and the nation’s high inflation hopefully recedes.

“The Fed could start thinking about a pause in rate hikes, potentially for the end of the year,” Thomas Costerg of Pictet said in a report. “However, it is still too early to talk about rate cuts.”

Perhaps giving some hope to the market for the future, Powell also said, “At some point, as the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases.”

Analysts said Powell also seemed to indicate expectations for future inflation aren’t taking off. If that were to happen, it could cause a self-perpetuating cycle that worsens inflation.

A report Friday morning showed that the Fed’s preferred gauge of inflation decelerated last month and wasn’t as bad as many economists expected. It’s an encouraging signal, which may embolden more of Wall Street to say that the worst of inflation has already passed or will soon.

Other data showed that incomes for Americans rose less last month than expected, while consumer spending growth slowed.

Following the reports and Powell’s comments, the yield on the 10-year Treasury rose to 3.04% from its 3.03% level from late Thursday.

The two-year Treasury yield, which more closely tracks expectations for the Fed’s actions, rose more. It climbed to 3.43% from 3.37%.

The Fed has already hiked its key overnight interest rate four times this year in hopes of slowing the worst inflation in decades, with most of the increases by more than the typical margin. The hikes have already hurt the housing industry, where more expensive mortgage rates have slowed activity. But the job market has remained strong, helping to prop up the economy.

In the stock market, shares of Ulta Beauty rose 1.4% after the retailer reported stronger profit for the latest quarter than expected. Perhaps more importantly, it raised its forecast for revenue and earnings for the full fiscal year. Other retailers have been cutting their forecasts as high inflation squeezes their customers, particularly lower-income ones.