Dow drops more than 1,000 points as worries grow over higher interest rates

BY: Jason Whigham
May 24, 2022

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NEW YORK (AP), — The Dow Jones Industrial Average fell more than 1,000 points Thursday due to worries that higher interest rates by the Federal Reserve in their fight against inflation will slow down the economy.

The benchmark S&P 500 lost 3.6% on Monday, just one day after posting its largest gain since May 2020. The Nasdaq plunged 5%, marking its worst fall since June 2020. The Dow and other indexes lost more than the gains made a day earlier.

“Yesterday’s sharp rally wasn’t rooted in reality, and today’s dramatic selloff marks a reversal that misplaced exuberance,” stated Ben Kirby (co-head of investments at Thornburg Investment Management).

Wall Street’s sluggish day-to-day turnaround reflects investors’ uncertainty over the range of economic threats facing them. This includes inflation at its highest point in 40 years and the Federal Reserve’s offer to lower prices by raising interest rates.

The Federal Reserve announced Wednesday a half-percentage-point increase in its short term interest rate. This was widely anticipated. Stocks rebounded after the announcement, but then rose sharply as bond yields fell. Fed Chair Jerome Powell assured investors that the central bank was not considering moving to aggressive, three-quarters rate hikes. This is because the Fed will continue with rate increases in the coming months.

Stock investors didn’t get any relief from Powell’s comments on Thursday. Stocks fell and bond yields rose. The 10-year Treasury note yield rose to 3.04%. Rising yields will put upward pressure upon mortgage rates which are at their highest point since 2009.

The Fed’s ability to control inflation without causing a recession is a concern for investors. Investors are also worried about rising inflation and uncertain supply chain disruptions.

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Terry Sandven, chief equity strategist, U.S. Bank Wealth Management, stated that “the biggest problem is there are just too many moving parts.”

S&P 500 lost 153.30 points at 4,146.87. The Nasdaq fell 647.16 to 12,317.69. The Dow briefly fell 1,375 points before closing down 1,063.09 point, or 3.1% to 32,997.97.

Stocks of smaller companies also dropped sharply. The Russell 2000 dropped 78.77 points or 4% to 1,871.15.

Investors are worried about the Fed’s aggressive move to raise interest rates. It is not being able to manage the delicate dance of slowing the economy enough to stop high inflation, but not too much to cause a downturn. Wall Street is closely monitoring the pace and extent of interest rate rises.

“Investors realized the Fed’s continued moderation could allow inflation to spiral out of control,” stated Sam Stovall (chief investment strategist at CFRA).

Widely expected, the Fed’s latest decision to raise interest rates by half-percentage point was widely anticipated. The markets remained steady this week, although Wall Street was worried that the Fed could decide to increase rates by three-quarters if it does not update its policy. Powell reassured Wall Street that the central bank was not actively considering such an increase.

Also, the central bank announced that it would begin reducing its $9 trillion balance sheet. This balance consists mainly in Treasury and mortgage bonds. It will be effective June 1. These large holdings are a Fed policy tool to maintain low long-term interest rates such as those on mortgages.

The Fed didn’t consider a massive increase in short-term interest rates when Powell stated that it was not considering it, sending a signal to investors to send stock markets soaring and bond yields plummeting. Slower interest rate hikes would reduce the risk of the economy falling into recession and put less pressure on all investment prices.

The odds of the Fed raising rates by three quarters points are not in jeopardy. BNP Paribas economists still expect that the Fed will continue to raise the federal funds rate to a range of 3 to 3.25%. This is up from zero to 0.2% earlier in the year.

“We don’t believe this was Chair Powell’s intention,” BNP Paribas economists wrote in a report. They cited Wednesday’s market jubilance and said that “Fedspeak” could be coming to tighten financial conditions.

The Bank of England raised its benchmark rate to its highest level in 13 year, the fourth rate increase since December. This is a result of U.K. inflation running at 30-year highs.

The conflict in Ukraine continues to make energy markets volatile, and the demand for oil is high despite tight oil supplies. European governments are looking at an embargo to replace Russian energy supplies. OPEC, allied oil-producing nations, decided on Thursday to increase crude oil deliveries to the rest of the world.

Investors are worried about rising oil and gas prices. They want to know how inflation will affect businesses, consumer activity, and overall economic growth.

As long-term average home loan rates rose, the number of homebuilders declined sharply. D.R. Horton fell 5.8%

According to Freddie Mac, the average rate for a 30-year fixed-rate mortgage increased to 5.27% this week. This is its highest level since 2009. It was 2.96% a year ago. The 10-year Treasury yield tends to be the most influential factor in mortgage rates. After years of rising home prices, the sharp rise in mortgage rates has made it more difficult for homeowners to afford their homes.

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