By Rachel Siegel
Stock markets sank to their lowest levels since 2020 on Friday, continuing a bad slump that began in August as investors try to grapple with economic head winds in the United States and around the world that are only likely to worsen.
Stock indexes were on track to close out the week with losses, capping the fifth decline in the past six weeks.
The Dow Jones industrial average dropped by nearly 600 points, or 1.8%, by early Friday afternoon, and fell below its 30,000 mark.
The S&P 500 slid by almost 2% , as did the Nasdaq Composite.
The Federal Reserve has pledged to get inflation back under control – even if slowing the economy means unemployment rises and households and businesses feel some pain.
And although the Fed’s move to raise interest rates this week was widely expected, stock markets are feeling that pain already.
The bad market news – and the Fed’s forecast of a sharply slowing economy – could also affect campaigns for this fall’s midterm elections in Congress, where Republicans have been hoping voters will blame President Biden and Democrats for high inflation.
The full weight of the Fed’s actions since March – pushing a key interest rate up by 3 percentage points already, with more increases still to come – may not be felt until later this year or next.
But financial markets are taking in the central bank’s promise and sending alarms back out – making clear that no matter how many times Fed officials say they’re going to do whatever they can to crush inflation, the idea still roils Wall Street.
“I believe it’s probably going to get worse before it gets better,” said Dan Ives, managing director and senior equity research analyst at Wedbush Securities.
Analysts say the drop is not only about the Fed’s moves so far, but also about further tightening ahead, and the growing likelihood that the Fed cannot get inflation down without causing a recession.
“A soft landing would be very challenging, and we don’t know – no one knows – whether this process will lead to a recession or if so, how significant that recession would be,” Fed Chair Jerome H. Powell said Wednesday, after the Fed’s rate announcement.
The central bank is rushing to cool down the economy and get consumer prices down.
Officials are not seeing enough progress yet. But the market jitters reflect a domestic and global economy already headed for a slowdown.
Oil prices fell to the lowest levels since January. The S&P energy sector was also down more than 6%.
Shares in large tech firms including Apple, Amazon, Microsoft and Meta Platforms fell Friday.
Goldman Sachs cut its year-end S&P 500 forecast, driven largely by climbing interest rates.
On the flip side, bond yields rose this week after the Fed’s latest rate hike, and the 2-year and 10-year Treasury rates hit highs unseen for more than a decade.
Major market indexes are down significantly for the year so far, though the long bull market that lasted until recently means they’re still up more than 30% over the last five years.
The brutal close to the week came after the Fed raised rates yet again by three-quarters of a percentage point, its third such move and fifth hike of the year in its fight against inflation.
Wednesday’s increase would have been considered outlandishly large until recently.
But Fed officials want to push rates past the “neutral” zone of roughly 2.5%, where rates neither slow nor juice the economy, and into “restrictive territory” that dampens consumer demand.
The Fed’s benchmark interest rate now sits between 3% and 3.25%, and officials expect it to cross 4% by the end of the year, well into what is considered restrictive.
That rate does not directly control rates for mortgages and other loans.
But it influences how much banks and other financial institutions pay to borrow, which helps drive loan pricing more broadly.
And crucially, the Fed’s own communications – be it remarks from Fed officials or policymakers’ economic projections – are key to shaping financial conditions, and getting the markets to start pricing in rates hikes that are still to come.
Monetary policy famously operates with a lag, and the Fed’s rate hikes so far haven’t led to meaningfully lower inflation yet. But the moves are showing up in the economy in other ways.
“Financial conditions have usually been affected well before we actually announce our decisions,” Powell said this week. “Then changes in financial conditions begin to affect economic activity fairly quickly, within a few months.”
“But it’s likely to take some time to see the full effects of changing financial conditions on inflation.”
Diane Swonk, chief economist at KPMG, said traders are jittery about how the Fed’s moves will be magnified as other central banks also ramp up their fights against inflation.
The Fed was among a slate of global central banks to raise rates this week – the Bank of England raised its rate by a half a percentage point on Thursday, for instance, and warned that the United Kingdom may already be in a recession.