Dow plunges to close 130 points down after Fed chair Jerome Powell alarmed investors by saying 'there's quite a bit of room to raise interest rates' after two days of wild market swings

  • US stock indexes reversed their gains on Wednesday after Fed policy statement
  • Markets rose on Fed policy statement but plunged as Powell took questions
  • Fed chair spooked investors by saying 'there's quite a bit of room' to raise rates 
  • Central bank pointed to a March rate hike on Wednesday afternoon
  • Markets have been roiled by two days of wild swings to start the week 



U.S. stock indexes reversed their earlier gains on Wednesday, after Federal Reserve Chair Jerome Powell appeared to alarm investors with his remarks on future interest rate hikes.

After jumping as much as 400 points, the Dow plunged as Powell spoke and ended the session down 131 points, or 0.38 percent. The benchmark S&P 500 sank 0.15 percent and the tech-heavy Nasdaq eked out a gain of 0.02 percent.

While markets responded positively to the Fed's initial policy statement, which telegraphed March as the target for the first interest rate hike since the outset of the pandemic, stocks plunged as Powell began to take questions at a press conference.

'I think there's quite a bit of room to raise interest rates without threatening the labor market,' said Powell in response to a question, sending stocks on their downward dive.  

Investing Privacy Policy

U.S. stock indexes reversed their earlier gains on Wednesday, after Federal Reserve Chair Jerome Powell appeared to alarm investors

Traders work on the floor of the New York Stock Exchange (NYSE) on Wednesday

The Dow spent most of Wednesday in positive territory before reversing as Powell spoke

At the close of its two-day meeting on Wednesday, the U.S. central bank signaled the start of an interest rate hike cycle beginning March, as markets had expected.

With high inflation squeezing consumers and businesses and unemployment falling steadily, the Fed also said it would phase out its monthly bond purchases, which have been intended to lower longer-term rates, in March. 

Powell took repeated questions about how and when the central bank will start letting its balance sheet shrink after buying trillions of dollars of bonds through the pandemic.

Powell said several times that policy makers have not set a timetable for when it will start reducing its balance sheet and that the Fed sees short-term rates as the main lever it will use to adjust monetary policy. 

But he also acknowledged that the balance sheet is substantially larger than it needs to be and that the economy no longer needs to have such highly supportive action.

By raising rates, the Fed will be betting that it can slow inflation without weakening the economy too much. 

Powell is under pressure to hike interest rates to combat soaring inflation

The central bank's policy moves have gripped worried investors this week, sending markets into wild gyrations. The Dow logged significant losses followed by reversals on both Monday and Tuesday, a pattern that was reversed in Wednesday's trading. 

Speaking at a news conference, Chair Powell expressed his view, as he has before, that controlling inflation is itself vital to a strong job market. 

'The best thing we can do to support continued labor market gains,' Powell said, 'is to promote a long expansion, and that will require price stability.'

'I think there´s quite a bit of room,' he added, 'to raise interest rates without threatening the labor market. This is by so many measures an historically tight labor market.'

The Fed on Wednesday also set out principles it will follow once it decides to reduce its nearly $9 trillion in bond holdings, a sum that has more than doubled since the pandemic struck nearly two years ago. 

Some analysts expect the Fed to begin doing so as soon as July, a move that would contribute to tighter credit.

The central bank's latest policy statement follows dizzying gyrations in the stock market as investors have been gripped by fear and uncertainty over just how fast and far the Fed will go to reverse its low-rate policies, which have nurtured the economy and the markets for years. 

The broad S&P 500 index fell nearly 10 percent this month before rebounding slightly Wednesday.

The Fed has kept benchmark interest rates near zero since the onset of the pandemic

The Fed has also been pouring cash into the economy by buying bonds using cash that it has created out of thin air. Above, the Fed balance sheet shows its ballooning assets

Stock prices, which had been solidly higher before Powell spoke, tumbled during his news conference. 

The market swoon coincided with Powell acknowledgement that the Fed's balance sheet is substantially larger than it needs to be and that the economy no longer requires such highly supportive action. 

That suggested that the Fed might act sooner and faster than expected to shrink its balance sheet, which would contribute to tighter credit conditions.

The Fed's bond purchases, which have swollen the central bank's balance sheet, had been intended to reduce longer-term interest rates to spur borrowing and spending. 

Many investors also saw the bond buying as helping fuel stock market gains by pouring cash into the financial system.

Asked about the stock market's wild volatility, Powell stressed that the Fed´s 'ultimate focus' is on the 'real economy.' But he added: 'We feel like the communications we have with market participants and the general public are working. Monetary policy works significantly through expectations.'

High inflation has become a serious political threat to President Joe Biden and congressional Democrats, with Republicans pointing to rising prices as one of their principal lines of attack as they look toward the November elections.

Yet Biden said last week that it was 'appropriate' for Powell to adjust the Fed´s policies. And congressional Republicans have endorsed Powell´s plans to raise rates, providing the Fed with rare bipartisan support for tightening credit.

A pedestrian walks past the New York Stock Exchange earlier this week

A five-day view of the S&P 500 shows the index's wild swings in choppy trading

The Nasdaq has been the most affected by volatility, losing 7% in the past week

Earlier this month, minutes of the Fed´s December meeting revealed that the central bank was considering reducing its bond holdings by not replacing bonds that mature - a more aggressive step than merely ending its purchases. 

The impact of the reducing the Fed´s bond stockpile isn't well known. But the last time that the Fed raised rates and reduced its balance sheet simultaneously was in 2018. The S&P 500 stock index fell 20 percent in three months.

By not replacing some of its bond holdings, the Fed in effect reduces demand for Treasuries. This raises their yields and makes borrowing more expensive

Some analysts have said they aren´t sure how big the impact on interest rates will be or how much the Fed will rely on reducing its balance sheet to affect interest rates.

All of which means the Powell Fed faces a delicate and even risky balancing act. 

If the stock market is engulfed by more chaotic declines, economists say, the Fed might decide to delay some of its credit-tightening plans. Modest drops in share prices, though, won´t likely affect the Fed´s thinking.

Some economists have expressed concern that the Fed is already moving too late to combat high inflation. 

Others say they worry that the Fed may act too aggressively. They argue that numerous rate hikes could unnecessarily slow hiring. In this view, high prices mostly reflect snarled supply chains that the Fed´s rate hikes are powerless to cure.

This week´s Fed meeting comes against the backdrop of not only high inflation - consumer prices have surged 7 percent in the past year, the fastest pace in nearly four decades - but also an economy gripped by another wave of COVID-19 infections.

Powell has acknowledged that he failed to foresee the persistence of high inflation, having long expressed the belief that it would prove temporary. 

The inflation spike has broadened to areas beyond those that were affected by supply shortages - to apartment rents, for example - which suggests it could endure even after goods and parts flow more freely. 

Earlier on Wednesday, Microsoft shares jumped 3.2 percent in premarket trading as the tech giant forecast revenue for the current quarter broadly ahead of Wall Street targets.

In its earnings report before the bell on Wednesday, Dow component Boeing surprised the street with a massive adjusted quarterly loss of $4.5 billion, worse than analysts had expected.

However, the planemaker blamed the loss on significant one-time charges, and also reported positive free cash flow for the first time since the onset of the pandemic.

Market reaction to Boeing's report was initially mixed, but the company's shares sank 4.8 percent by the end of trading.  


Dow plunges to close 130 points down after Fed chair Jerome Powell alarmed investors

  View all

🤐🤢🤯 The comments below have not been moderated.

  View all

The views expressed in the contents above are those of our users and do not necessarily reflect the views of MailOnline.

We are no longer accepting comments on this article.