After a largely sleepy summer, the stock market roared to life on Friday as investors sold off stocks amid concerns that the Federal Reserve is poised to increase a key interest rate.
Before Friday, when the Standard & Poor’s 500-stock index fell 2.45 percent, markets had remained fairly steady since early July. The S&P 500 had not seen a swing of greater than 1 percent since July 8, and Friday’s plunge was the biggest recorded since Britain roiled the markets with its June vote to leave the European Union.
Wall Street’s jitters started before the official trading day began. Speaking before markets opened, Boston Fed President Eric Rosengren said that the improving job market is finally starting to lead to higher wages for workers. Meanwhile, the risks to the recovery from turmoil overseas appear to have faded.
“A reasonable case can be made for continuing to pursue a gradual normalization of monetary policy,” Rosengren said in a speech in Quincy, Mass.
Investors had largely discounted the prospect of a rate increase by the Fed this month, and Rosengren’s comments appeared to catch them off guard, particularly because he has been a staunch supporter of keeping rates low. On Thursday, investors were betting there was a less-than-20-percent chance that the central bank would raise rates. By Friday, it was up to nearly 25 percent.
Rosengren is just one voice on the Fed’s rate-setting committee. Another influential official, Fed Gov. Daniel Tarullo, was interviewed Friday morning on CNBC and suggested he is wary of raising rates again when he said that the momentum in the recovery appeared to be slowing down. Meanwhile, inflation has been running below the Fed’s target of 2 percent for several years.
“I’ve been characterized as being in the show-me camp, which is to say I would like to see more tangible evidence of inflation,” Tarullo said.
The Fed raised rates nine months ago for the first time since the Great Recession, but it has been on hold ever since as the nation’s economy has been buffeted by fears of a slowdown in China, Britain’s decision to leave the European Union and a temporary slump in hiring at home. Investors have been anxiously awaiting its next move, and many say that they believe the central bank will increase in December if it delays once again at its meeting later this month.
The Fed’s benchmark interest rate helps determine the cost of borrowing money throughout the economy, from the rate on a mortgage to the price tag for building a factory. The Fed generally raises rates when it wants to encourage saving and slow down economic growth. It lowers rates when it wants to stimulate borrowing and speed up the economy.
Another key Fed official, Gov. Lael Brainard, is slated to speak Monday. Investors say that they believe her remarks will provide important clues to which direction the Fed is leaning. She will be the last top official to speak before the central bank’s pivotal meeting in Washington.
Friday’s sell-off was broad-based, though utility and energy stocks were hit especially hard. The Dow Jones industrial average fell 2.13 percent. The tech-heavy Nasdaq composite index sank 2.54 percent. The one-day drop, though, does not necessarily signal that we’re in for a sustained decline in the markets.
European markets also took a hit on Friday. Great Britain’s FTSE 100 index fell 1.19 percent, while France’s CAC 40 was down 1.12 percent. Crude oil prices sank to $45.88.
“I’m certainly not enjoying today’s market theatrics, but I’m not particularly concerned either,” said Brad McMillan, chief investment officer of Commonwealth Financial Network, in a research note. McMillan said that’s because the fundamentals of the economy, including consumer spending, remain relatively healthy.