Stocks rose late Wednesday afternoon after the Federal Reserve announced it would raise interest rates by half a percent. Although it was the biggest jump since 2000 and Fed Chairman Jerome H. Powell said comparable increases were “on the table”, investors appeared relieved after saying the board of directors had not seriously considered going higher. The Dow closed more than 932 points higher, or 2.8%. The S&P 500 and Nasdaq composite indices climbed 3% and 3.2% respectively.
Thursday was a much different story. Tech stocks that powered many indexes fell: Apple fell 5.2%, Google lost 5.4% and Amazon fell 7.5%. (Amazon founder Jeff Bezos owns The Washington Post.)
Risk-averse investors have abandoned cryptocurrencies. Bitcoin and Ethereum each fell more than 7%. Traders looking for safer bets drove the 10-year Treasury note up 3%.
“The market is far too optimistic about the Fed’s ability to control inflation,” said Nancy Davis, founder of asset management firm Quadratic Capital Management. “The Fed is marching aggressively in a weakening economy. They can raise fares as much as they want – fare hikes don’t put more truckers on the roads.
Investors fear that Powell and the Fed will seek to act more aggressively on rate hikes, raising fears that the economy is heading into recession and stagflation, a period of high inflation and slow growth.
The US economy unexpectedly contracted 1.4% in the first quarter, according to federal data. A recession is defined as two consecutive quarters of contraction.
Faced with soaring prices and a booming labor market with a record number of job openings, the Fed is betting that a steady series of hikes will reduce inflation, cool the economy and ensure a more durable recovery from the coronavirus, at a time when many uncertainties hang over the global economy. Russia’s invasion of Ukraine has driven up energy prices, and China’s covid-19 shutdowns have sparked a fresh wave of supply chain grunts, both threatening to return work from the Fed much more difficult.
Domestic markets have also thrown a spanner in the plans. April was the worst month for the S&P 500 since March 2020 and capped its worst start to a calendar year since World War II.
“Whatever the most warmongering movement, the [Fed] had envisioned for today, last week’s stock market rout may have led them to a more measured and gradual pace of rate hikes,” said Chris Rupkey, chief economist at market research firm FWD. Bonds, in a Wednesday note. “The trick is to tighten financial conditions, but not be too aggressive with too many rate hikes that precipitate a disorderly market crash that destroys business and consumer confidence.”
Rachel Siegel contributed to this report.