Stocks took heavy losses Thursday after Federal Reserve Chairman Jerome Powell said the central bank would not hike interest rates for only a temporary rise in inflation.
The Dow Jones Industrial Average closed with a loss of nearly 350 points Thursday, falling 1.1 percent. The Nasdaq composite fell 2.1 percent, wiping out its 2021 gains, and the S&P 500 fell 1.3 percent.
The yield on a 10-year Treasury bond also rose to 1.54 percent Thursday, a sign of rising inflation fears on Wall Street.
The stock market has been volatile for several weeks amid growing concern among some traders about the Fed’s approach to inflation as the U.S. appears to be nearing the end of the coronavirus pandemic.
Treasury yields have steadily risen from ultra-low levels as President Biden’s $1.9 trillion economic relief package makes it way through Congress and the pace of COVID-19 vaccinations increase, raising hopes of a swift rebound and fears of steep inflation.
The rise in rates has also spurred steep losses in technology stocks, which exploded in value during the pandemic and are more vulnerable to higher borrowing costs than other industries.
Inflation itself, however, remains well below the Fed’s target of 2 percent. The personal consumption expenditure price index minus food and energy, the Fed’s preferred metric, rose just 1.5 percent in the 12-month period ending in January.
Powell has welcomed the increase in rates as a sign of confidence in the U.S. economy’s eventual recovery from the coronavirus recession. Despite pressure from markets, the Fed chief insisted Thursday that while inflation might rise temporarily, it would not be persistent enough to warrant an interest rate hike.
“We expect that as the economy reopens and hopefully picks up, we will see inflation move up through base effects,” Powell said during a Wall Street Journal virtual event.
Inflation measured on a 12-month basis will likely increase as the timeline for measuring price and wage increases no longer includes the onset of the pandemic, he added.
“That could create some upward pressure on prices,” Powell said.
While the Fed chief ceded that the pace of Treasury yield increases caught his attention, he reiterated that the depth of the damage to the U.S. economy and changes in inflation dynamics would prevent rampant price and wage increases from taking hold.
Powell said that he expected to see “prices moving up, but not staying up and certainly not staying up to the point where they would move inflation expectations materially above 2 percent,” the Fed’s ideal annual level of inflation.
While Powell’s message was nearly identical to months of previous statements, the sell-off accelerated during his remarks when it became clear the recent rise in Treasury yields did not change his approach.
“There’s a growing worry that the economy may be running away from the Fed. While the thought of rapid change could be enough to scare investors now, we see higher inflation as a long-term positive for the market,” said Lindsey Bell, chief investment strategist for Ally Invest, in a Thursday analysis. “We’re still seeing historically low levels of inflation, so it would take a lot of change for inflation to get out of control. If you’re worried about inflation, there are ways you can protect your portfolio.”