Financial markets reeled Thursday as they adjusted to the Federal Reserve’s latest attempts to address inflation.
The Dow Jones industrial average ended the day down more than 700 points, or 2.4 percent, closing around 29,927. It was the first time the index closed below 30,000 since January 2021. The broader S&P 500 index fell more than 3 percent, while the tech-heavy Nasdaq dropped just over 4 percent.
Mortgage rates, meanwhile, continued their ascent. The average 30-year fixed-rate mortgage rate has soared to 5.78 percent, according to data released by Freddie Mac. It was 5.23 percent one week ago, marking the biggest one-week jump since 1987. One year ago, these rates averaged less than 3 percent.
Housing prices had skyrocketed in many parts of the country during the pandemic, pricing many Americans out of homes or forcing them to stretch in order to make payments. Higher borrowing rates could cool off the housing market and possibly bring prices down, a positive development for buyers but potentially putting many jobs related to the housing industry at risk.
The Fed’s actions come against a backdrop of high gas prices and a strong labor market, creating a transitory economy that has stumped many business executives and economists as they try to plan for the future. The stock market has fallen markedly so far this year, but the economy has also added several million jobs. Gas prices have soared since Russia invaded Ukraine in February, and inflation has shown no signs of easing. The Fed’s move on Wednesday appears to be accelerating a range of economic shifts.
Millions of Americans are exposed to changes in the stock market and mortgage rates, both directly and indirectly. Falling investment portfolios could prompt people to lower spending on things such as travel or dining, which in turn leads to a fall in revenue at places including hotels and restaurants. Similarly, higher mortgage rates can affect the decisions of new home buyers but also prospective home sellers as people reevaluate the economic wisdom of their decisions.
The central bank had delayed taking action last year even amid signs that inflation was taking hold across the U.S. economy, but this year the Fed has launched an aggressive push to raise interest rates amid concerns that rising prices could lead to major economic turmoil.
Markets have suffered steep losses in the first half of 2022 as a volatile mix of inflation, changing central bank policy, geopolitical upheaval and continued global concerns tied to the coronavirus pandemic added to market uncertainty. The S&P 500 index remains in bear territory, defined as a 20 percent drop from its most recent peak, while the Nasdaq is off 32 percent year to date.
Even as corporate earnings have remained steady, the market has punished stock prices amid the uncertainty.
“Today’s sell-off is a rational response to yesterday’s policy decision in light of the accelerated pace of tightening, weaker growth and stubbornly high inflation,” said Kate Moore, head of thematic strategy for global allocation at BlackRock. Investors will next look to second-quarter earnings to gauge how executives are interpreting the rising risks of a recession, she said, adding that until there are definitive signs of cooling inflation and confirmation that corporate earnings will not collapse, equity markets will remain weakened.
Inflation and rising interest rates roiled markets elsewhere, too. The United Kingdom’s central bank is set for its fifth straight interest rate hike as the U.K. is also struggling to control inflation. The European Central Bank, which acts as the central financial stabilizer for the European Union, plans to start raising rates later this summer, the first rate hike in more than a decade, a central bank official told CNBC in late May.
“We believe inflation will peak soon and slowly moderate for Western developed economies,” said Kristina Hooper, the chief global market strategist at Invesco. “However, we recognize that the only factor that central banks can control is demand; there are external factors, such as the Russia-Ukraine war and covid shutdowns in China, that could have a significant impact.”
European and Asian markets reeled Thursday. The pan-European Stoxx 600 lost nearly 2.5 percent, while Germany’s DAX and France’s CAC 40 traded down 3.3 percent and 2.4 percent, respectively. Hong Kong’s Hang Seng index lost 2.2 percent, while India’s Mumbai Sensex lost 2 percent.
New jobless claims fell by 3,000 to a seasonally adjusted 229,000, according to new data released Thursday by the Labor Department, indicating that the number of Americans filing for unemployment benefits has remained relatively level for the year. A widely followed proxy for layoffs, the level of jobless claims will be closely scrutinized for hints of a weakening labor market, as fears of a potential recession grow.
The Fed’s move to raise interest rates was designed to cool the economy by curbing consumer spending. At higher rates, consumers will find the prices of mortgages, auto loans and other financed purchases harder to manage. By discouraging people from borrowing money, the Fed aims to temper demand, which would eventually force prices to come down and stabilize inflation.
But tinkering with interest rates can resemble a high-wire act.
Fed officials are striving to achieve a fine balance: bring prices down without also slowing the economy too much, which can lead to mass layoffs and a recession, creating a new set of problems potentially on top of surging prices. Fed leaders have acknowledged that their more aggressive efforts to tackle rising prices could invite a storm of harsher consequences.
The significant rate hike followed higher-than-expected inflation data released last week.
“We don’t seek to put people out of work, of course. We never think too many people are working and fewer people need to have jobs,” Powell said at a news conference after the decision Wednesday. “But we also think you really cannot have the kind of labor market we want without price stability. We have to go back and establish price stability.”
Downtrodden investors are also reacting to less optimistic projections from the central bank. New figures released Wednesday pointed to greater unemployment, reduced economic growth and inflation that takes longer to subside.
The Fed expects the unemployment rate to tick up to 3.7 percent by the end of the year and continue to rise to 3.9 percent in 2023, in anticipation of slowed hiring and squeezed demand from consumers.
“With growth expected to be weaker, the projections now anticipate an increase in the unemployment rate,” said Bill Adams, chief economist for Comerica Bank. Still, Adams said that if the slowdown turns into an outright recession, the Fed could pull back on future rate hikes, or end the increases earlier than it had planned.
Kathy Orton contributed to this report.