Stocks closed with steep losses Thursday after the Federal Reserve boosted interest rates at the quickest pace since 1994.
The Dow Jones Industrial Average lost 741 points by the closing bell Thursday, falling 2.4 percent and below 30,000 points for the first time since 2020. The S&P 500 index closed with a loss of 3.3 percent and the Nasdaq Composite plunged to a loss of 4.1 percent.
Thursday’s selloff comes after the Fed announced it would hike its baseline interest rate range by 0.75 percentage points, the largest rate hike since 1994, after a surprising May surge in inflation alarmed central bank officials. While the market briefly rallied after the Wednesday decision, stocks plunged soon after the Thursday opening bell and fell deeper into the close.
“Markets believed and applauded Chairman Powell’s resolve to fight rising inflationary pressures —- and that’s the problem,” wrote Quincy Krosby, chief equity strategist at LPL Financial, in a Thursday research note.
“With quantitative tightening beginning, and the Fed Funds futures market pricing in another 75 basis point hike at the next meeting, concerns are mounting about whether the Fed is headed towards a policy mistake.”
Interest rate hikes tend to slow stock market gains as higher borrowing costs prompt more consumers to save money rather than invest it in riskier assets. Business profit margins also tend to decline as borrowing costs increase and consumer spending slows under the weight of higher interest rates.
Investors and economists are also becoming increasingly concerned with how fast the Fed must raise interest rates to stay ahead of inflation. While Powell expressed hope Wednesday that the Fed could bring inflation down without causing a recession, he acknowledged it was becoming more difficult to do so as the war in Ukraine drives up prices for oil, food and other key commodities.
Experts fear that the Fed may need to raise interest rates high enough to bring the U.S. economy to a standstill to stop inflation from rising.
“Although Powell insisted that the U.S. economy is strong enough to withstand further rate hikes, he also made it clear that without price stability, the still robust labor market will falter, as will the overall economy. In other words, corralling inflation is ‘paramount,’” Krosby wrote.
Investors also appeared alarmed by new data released Thursday showing a sharp increase in mortgage interest rates and steep decline in new home construction.
Interest payments for the U.S. benchmark 30-year fixed rate mortgage rose at the fastest weekly pace in 35 years, hitting 5.78 percent as of Thursday. A monthly mortgage payment on a roughly median-valued $400,000 home would now be $1,874 after a 20 percent down payment, up more than $500 over last year.
The rate of new homes under construction also fell 14.4 percent in May, according to data released Thursday by the Census Bureau.