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Stock recovery falters after Fed chief acknowledges recession risk

The Dow, S&P 500 and Nasdaq end the session with modest losses after Federal Reserve Chair Jerome Powell reiterates his commitment to beating back inflation in congressional testimony

Wall Street rebounded slightly after a brutal week of selling and as Fed Chair Jerome H. Powell reiterated his commitment to combating inflation during Senate testimony Wednesday. (Brendan Mcdermid/Reuters)
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U.S. stocks tipped into losing territory as the head of the Federal Reserve reiterated his commitment to combating inflation while acknowledging the potential for the U.S. economy to fall into a recession.

The trading day took off as Fed Chair Jerome H. Powell began his first session of congressional testimony on Wednesday, focusing on the central bank’s tightening monetary policy. Last week, the Fed introduced a three-quarters of a percentage point jump, its largest increase since 1994.

After clinging to the slightest of gains during afternoon trading, Wall Street gave up on an attempted comeback and the Dow Jones industrial average ended the session down 47.12 points, or nearly 0.2 percent, to close at 30,483.13. The S&P 500 and tech-heavy Nasdaq also fell modestly, by 0.1 percent and 0.2 percent, respectively.

Oil prices sank after the White House signaled a new plan to cool soaring fuel prices, which have been hovering near a national average of $5 a gallon. On Wednesday, President Biden urged Congress to suspend the federal gas tax of 18.3 cents per gallon for three months. He also called on states to suspend their own gas taxes and ask oil companies to lower prices.

What a pause in the gas tax would mean for prices at the pump

Brent crude, the international benchmark, dropped 0.8 percent to near $110 a barrel Wednesday. West Texas Intermediate crude, the U.S. benchmark, dropped 3.8 percent to $105 a barrel.

Powell said during the testimony that because oil prices are set globally, “there’s really not anything” the Fed can do to bring relief at the pump.

While stock losses were modest Wednesday, experts said that Wall Street’s performance should not be taken as a turning sign toward optimism. “I would expect some investors to use yesterday’s rally as an excuse to sell equities,” said Kristina Hooper, strategist at Invesco. The negative mood will persist until the Fed shows the possibility of a less aggressive tightening policy, which Hooper expected to see in September.

Nicole Tanenbaum, chief investment strategist at Chequers Financial Management, said that key economic indicators signaled a slowing economy.

Attempts to bring down rapidly rising home prices, which are increasingly unaffordable for many Americans, ranks as a key concern for central bank officials. During the coronavirus pandemic, low mortgage rates fueled demand for housing, pushing home prices skyward. Raising rates cools demand because it makes borrowing more expensive.

Powell: Inflation could bring more surprises

Compared to a year ago, a National Association of Home Builders survey shows a 32 percent decrease in prospective home buyer traffic. And 11 percent fewer single family houses were sold in June 2022, compared with the year prior.

Powell told Congress that buyers need time to reset while navigating the housing market. “How much will it really affect residential investment? Not really sure. How much will it affect housing prices? Not really sure. We’re watching that quite carefully,” Powell said. The U.S. median sales price of a home was $428,700 at the end of the first quarter, compared with $369,800 in the year-ago period, according to Fed data.

“Millions of Americans have already been acutely feeling the effects of inflation across everyday life, whether it be filling up gas at the pump, shopping for groceries or buying a new car,” Tanenbaum said. “Recession expectations can also become self-fulfilling as consumers and businesses alike may alter their behaviors in anticipation of a slowdown by cutting spending, delaying purchases or investment and reducing staffing headcount.”

In response to recession concerns, Powell acknowledged that “it was certainly a possibility.” However, he said that even with the increase, the interest remains at a “relatively low level.” Powell expected more hikes of three-quarters of a percentage point, but it’s unclear how many of the future rate hikes will come in at that level.

Shares of tobacco producer Altria plunged 9 percent Wednesday after the Wall Street Journal reported that the Food and Drug Administration could order e-cigarette maker Juul to remove its products off the U.S. market, following an agency review of its products’s harms on minors. Altria held a 35 percent stake in Juul’s stake. In the past month, Altria’s price has fallen 20 percent.

In the bond market yields on the benchmark U.S. 10-year treasury fell by 0.12 to 3.164 percent. Yields move in opposite directions to bond prices.

Cryptocurrencies dipped after climbing from new lows in recent days. Bitcoin slipped 2.5 percent to $20,181, approaching the $20,000 mark that signals high volatility. Ethereum dropped 3.9 percent.

Overseas, the European stocks dropped for the first time in three days. The benchmark Stoxx 600 dropped 0.7 percent. Similarly Hong Kong’s Heng Seng fell 2.6 percent, driven primarily by tech losses. South Korea’s Kospi tumbled 2.7 percent, while Japan’s Nikkei 225 fell by 0.4 percent.

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