Dow falls 450 points as Powell's hawkish tone in Congress sparks concerns over higher rates of interest

U.S. stock losses mounted in early afternoon trading Tuesday as investors digested Federal Reserve Chairman Jerome Powell’s hawkish message to Congress that the central bank won’t rule out larger rate of interest hikes with a purpose to tame stubborn inflation.

How are stocks are trading

The S&P 500
SPX,
-1.49%
is down 49 points, or 1.2%, to three,999
The Dow Jones Industrial Average
DJIA,
-1.65%
lost 469 points, or 1.4%, to 32,965
The Nasdaq Composite
COMP,
-1.11%
dropped 80 points, or 0.7%, to 11,595

On Monday, the Dow Jones Industrial Average rose 40 points, or 0.12%, to 33,431, the S&P 500 increased 3 points, or 0.07%, to 4,048, and the Nasdaq Composite dropped 13 points, or 0.11%, to 11,676.

What’s driving markets

“The most recent economic data have are available stronger than expected, which suggests that the final word level of rates of interest is prone to be higher than previously anticipated,” Powell said in prepared remarks to the Senate Banking Committee on Tuesday morning. “If the totality of the information were to point that faster tightening is warranted, we can be prepared to extend the pace of rate hikes.”

In February, the Fed raised the federal funds rate by 25 basis points, a much slower pace after a half-point move in December and 4 jumbo 75 basis-point rate increases last yr. Nevertheless, Powell’s testimony to Congress on Tuesday hinted that the Fed may consider to re-up the scale of their next rate increase to half-of-a-percentage-point at its next policy meeting on March 21-22.

Following Powell’s hawkish remarks, Fed-funds futures traders have priced in an over 60% likelihood of a 50 basis point rise, in line with the CME FedWatch tool. Traders had seen only a 30% likelihood of a half-percentage-point hike sooner or later earlier, and a 3.3% likelihood a month ago. That might take the foremost policy rate goal to between 5% and 5.25%.

The sizzling January employment and inflation data have led some investors to bet on a terminal fed funds rate of around 5.5% or at the same time as high as 6%, up from the FOMC’s average December projection of between 5% and 5.25%. This repricing led to a pointy stock-market selloff last month amid rising Treasury yields.

See: U.S. stocks drop as Fed chair Powell testifies to Congress

“Unsurprisingly, Powell delivered a message with hawkish undertones in his testimony to Congress. While acknowledging the recent string of economic data has been ‘stronger than expected,’ he reiterated that ongoing increases in policy rates are warranted,” wrote Charlie Ripley, senior investment strategist for Allianz Investment Management, in emailed comments.

“While some market participants may need been caught off guard by Powell’s comments, the fact is that he is basically affirming what the bond market has already priced in.”

The policy-sensitive two-year Treasury yield
TMUBMUSD02Y,
5.002%
jumped to five% on Tuesday afternoon. That was the best intraday level since July 2007, in line with Dow Jones Market Data. The ICE U.S. Dollar Index
DXY,
+1.13%,
a measure of the currency against a basket of six major rivals, jumped 1.1% to 105.53 and headed for one in all its highest levels since January.

“Powell has an awesome way of smoothing over the rough spots. I believe what caught people by surprise is the unvarnished hawkishness, slightly than his comments where he can sometimes balance his hawkishness with something more market friendly,” Steve Sosnick, chief strategist at Interactive Brokers
IBKR,
-0.22%,
said in a phone interview.

Perhaps some investors were growing “complacent” that the story line can be a gradual easing of rates of interest, but Sosnick said Powell’s stance is “very much consistent with data dependence” that Powell has been emphasizing. That puts extra urgency on what the numbers reveal in February’s jobs report, he said.

See: What stock-market investors wish to hear when Fed’s Powell testifies before Congress this week

Powell will even be quizzed by the House of Representatives’ Financial Services Committee on Wednesday.

The semiannual testimony comes days ahead of the February jobs report on Friday. The economy added 517,000 jobs in January, tearing past expectations and other recent data included a higher-than-expected January print for the Fed’s preferred inflation data.

Economic data releases Tuesday include January wholesale inventories, which declined for the primary time since mid-2020. The numbers, matching the estimates of economist polled by the Wall Street Journal, indicate businesses are shrinking their amount of unsold goods to correspond with softening consumer demand. Reports on January consumer credit are slated for release at 3 p.m.

Corporations in focus

Dick’s Sporting Goods Inc.
DKS,
+9.98%
shares jumped 10.8% on Tuesday after the retailer beat estimates on its fourth quarter results and offered a muscular full yr earnings outlook.
Meta Platforms Inc.
META,
-0.12%
shares were up 0.3% amid a report that the parent company of Facebook and Instagram is eyeing one other round of layoffs. Any extra trim to the workforce, as reported by Bloomberg News, would follow layoffs late last yr of greater than 11,000 employees.
Shares of WW International Inc.
WW,
+49.22%,
the corporate also often called Weight Watchers, rallied greater than 46%. The stock move comes after the corporate reported its fourth quarter results late Monday, also within the wake of Wall Street Journal reports that it was buying the telehealth platform Sequence.
United Airlines Holdings gained 4% after the Justice Department sued to dam JetBlue’s
JBLU,
-2.32%
acquisition of budget carrier Spirit Airlines
SAVE,
+3.92%.