Every sector in the S&P was in the red, with financial services among the biggest losers for the day. JPMorgan Chase, Bank of America and Wells Fargo each lost more than 2 percent. Several of the tech giants also suffered losses, including Facebook by 2 percent, while Apple and Google parent Alphabet each shed 1 percent.
“This notably more hawkish stance from the Fed has jolted investors as they assess the markets, and given that this shift comes on the back of record high stock market performance, it’s no surprise that equities have pulled back in response,” said Nicole Tanenbaum of Chequers Financial Management.
While the major stock indexes retreated for the day and are off their all-time highs, Wall Street is still up for this year. The S&P is up 11 percent since January while the Dow and Nasdaq have gained nearly 9 percent for the year.
Markets have been riding optimism about business reopenings and a robust coronavirus vaccine rollout. But investors have been on the lookout for signs that the Fed would be easing financial supports for the markets, including record low interest rates and continued asset purchases, which had helped prop up the stock market at the outset of the public health crisis.
While central bankers shared a mostly upbeat narrative of where they think the economy is heading Wednesday, they also boosted their estimates for inflation and signaled that interest rate hikes would come in 2023, sooner than expected.
Those sentiments were highlighted further Friday morning. St. Louis Federal Reserve President James Bullard told CNBC that as inflation climbs faster than previous projections, he sees the Fed initiating an interest rate hike at the end of next year to keep rising prices within the central bank’s target.
“We’re expecting a good year, a good reopening. But this is a bigger year than we were expecting, more inflation than we were expecting,” Bullard said on “Squawk Box.” “I think it’s natural that we’ve tilted a little bit more hawkish here to contain inflationary pressures.”
Bullard cautioned that other Fed officials maintained different projections that would not call for rate hikes so soon, underscoring an ongoing debate among experts about how long elevated inflation in the United States will last and how to handle it. Central bankers who think that rising prices are fleeting anticipate that interest rate hikes won’t kick in until further down the line, in 2023 or beyond.
In a global research report Friday, Bank of America economists noted that consumers are roaring back and businesses are ramping up investment. “We are at the halfway mark and 2021 is shaping up to be one blistering hot year,” the report said. The burst in demand, however, is colliding with constrained supply, leading to higher inflation, according to the economists, but the Fed is still waiting for more data before raising rates.
As the economic recovery plays out, experts are also watching risk factors that could slow the comeback, including the persistence of the coronavirus alongside flare ups of its variants and concerns about the slow pace of jobs gains.
The labor market has still not recovered 7 million jobs, underscoring the depth of the pandemic’s damage to employment. But central bankers estimate that the unemployment rate could fall to a pre-pandemic level of 3.5 percent by 2023.
“I am confident that we are on a path to a very strong labor market,” Federal Reserve Board Chair Jerome H. Powell said Wednesday.
The Fed has pointed to the widespread coronavirus vaccination effort as a driver behind boosted employment and economic activity. Central bankers expect economic growth to hit 7 percent this year, up from the 6.5 percent growth projection the Fed released in March.
For months, investors have tried to divine the future of the Fed’s monetary policy as more Americans become vaccinated. Critics have argued that the central bank has been too slow to react to sharply rising prices, which could curtail economic growth. But Fed officials and members of the Biden administration have maintained that higher prices are to be expected as businesses grapple with backlogged supply chains, pent-up demand and the nature of comparing this year’s figures to last year’s, when prices for many goods and services plummeted during the extremes of the pandemic-induced downturn.
Andrew Van Dam contributed to this report.