Dow Plunges 1,000 Points After Fed Chair Powell Warns Inflation Requires ‘Restrictive’ Policy For ‘Some Time’
Stocks posted their worst day in months on Friday after Federal Reserve Chair Jerome Powell in his highly awaited Jackson Hole speech doubled down on the central bank’s commitment to ease decades-high inflation with ongoing interest rate hikes, keeping in line with investor expectations but doing little to quell fears additional hikes could tip the economy into a recession.
In the speech, Powell said restoring price stability will “take some time” and requires the Fed to use its tools “forcefully” in order to bring high demand into a better balance with struggling supply.
“We must keep at it until the job is done,” Powell said, adding that history shows bringing inflation down often comes with “employment costs” that increase with a delay.
Stocks started plunging immediately after Powell’s comments, with the Dow Jones Industrial Average erasing morning gains and ending the day down 1,008 points, or 3%, to 32,283; the S&P 500 plummeted 3.4% to 4,057, and the tech-heavy Nasdaq 3.9% to 12,141—both recording their worst day since June.
The speech came after the Fed’s most closely watched inflation indicator, the personal consumption expenditures price index, showed Friday both the pace of consumer spending increases and inflation increases are slowing down—and by a much wider margin than expected.
After the release Friday, Atlanta Fed President Raphael Bostic said on CNBC the measure is a sign the economy has responded to Fed policy, though he also acknowledged there is “still a long way to go” on rate hikes and that ongoing policy changes will have a “restrictive” effect on the economy.
“A theme has become clear in the Fed’s public communication: Going forward policy needs to be tighter and then be kept in restrictive territory for “some time,” possibly for years,” says Troy Ludtka, a senior economist at Natixis CIB Americas. “It is difficult to see how this is credible without throwing the US into some version of a financial crisis.”
Despite growing optimism in recent weeks, the Fed’s withdrawal of pandemic stimulus measures and interest rate hikes this year have fueled concerns of impending recession—and tanked markets. Major stock indexes plunged into bear market territory in June as investors awaited the Fed’s biggest interest rate hike since 1998, but stocks have since largely recovered on hopes that inflation has finally peaked. At one point down 23% this year, the S&P is now off 13% since the start of January. However, the economy unexpectedly shrank for a second consecutive quarter this year, and expectations for third-quarter economic growth have fallen, particularly due to worse-than-projected housing market data.
What To Watch For
The Fed will make its next interest rate announcement at the conclusion of its Federal Open Market Committee’s two-day policy meeting on September 21. Goldman Sachs economists expect the FOMC to slow the pace of rate hikes to 50 basis points in September, and then 25 basis points in each of November and December, but they also “see risks tilted to the upside” given the possibility that inflation remains high for too long.
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