Stocks Fall After Powell Pledges More Big Rate Hikes To Combat Inflation

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Stocks fell slightly on Wednesday as a growing number of major Wall Street firms warned that the likelihood of a recession has risen sharply, while Federal Reserve Chair Jerome Powell pledged that the central bank is “strongly committed” to raising rates until inflation moderates.

Key Facts

Markets finished lower in choppy trading: The Dow Jones Industrial Average fell 0.2%, less than 100 points, while the S&P 500 lost 0.1% and the tech-heavy Nasdaq Composite 0.2%.

The Dow was down by as much as 400 points but stocks pared back losses following comments from Fed Chair Powell, who said the central bank is “determined to take the measures necessary to restore price stability” and that “ongoing rate increases will be appropriate.”

Citigroup became the latest Wall Street bank to increase its recession odds, meanwhile, forecasting a 50% chance of a downturn as consumer demand “looks to be softening.”

“The best case scenario is a ‘soft landing’ with a slight rise in the unemployment rate, but risks of a more significant downturn are rising,” Citi analysts wrote in a recent note.

Goldman Sachs on Tuesday put the odds of a recession at 30% in the next year and nearly 50% within the next two years, while also slashing GDP estimates by as much as 2% due to tighter monetary policy from the Federal Reserve.

Morgan Stanley strategists, meanwhile, raised their forecast to a 35% chance of a recession in the next year and predicted that the S&P 500 could plunge by another 20% as surging inflation remains “very stubborn.”

Crucial Quote:

The central bank is “moving expeditiously” to raise interest rates and remains “strongly committed” to doing so until there is “clear proof” that inflation is normalizing, Fed Chair Jerome Powell said in testimony before Congress on Wednesday. Facing questions from lawmakers about the central bank’s plan to combat decades-high inflation, he pledged that the Fed will keep raising rates at a fast pace—and further than projected—if surging inflation continues to persist.

Tangent:

Energy stocks were among the hardest-hit on Wednesday morning as oil prices fell: Shares of Exxon Mobil, Occidental Petroleum and Marathon Oil all declined by 3% or more. Despite the recent losses, the S&P 500 energy sector remains the best-performing area of the market this year, rising over 30%.

Key Background:

Experts are increasingly fearful that the Fed will plunge the economy into a recession as it continues to aggressively hike interest rates. The central bank raised rates by 75 basis points last week—the biggest increase in 28 years, while also hinting at a similarly large rate hike at the next policy meeting in July. Despite the decisive action from the Fed, markets fell to their worst weekly performance since March 2020 last week, with the S&P 500 falling nearly 6%. The benchmark index remains in bear market territory along with the tech-heavy Nasdaq, having fallen roughly 23% and 33% below their record highs, respectively.