Stocks fall as Fed signals rates need to go still higher

Stocks fell on Wall Street and Treasury yields rose Thursday afternoon after more indications from the Federal Reserve that it may need to raise interest rates much higher than many people expect to get inflation under control.

The S&P 500 fell 0.3% as of 1:47 p.m. Eastern, with retailers, banks and industrial stocks among the biggest weights on the benchmark index. The Dow Jones Industrial Average drifted between small gains and losses and the Nasdaq was down less than 0.1%.

Decliners outnumbered gainers by more than double on the New York Stock Exchange.

Smaller company stocks fell harder than the rest of the market. The Russell 2000 shed 0.9%.

Bond yields rose and hovered around multidecade highs. The yield on the two-year Treasury note rose to 4.46% from 4.37% late Wednesday. The yield on the 10-year Treasury, which influences rates on mortgages and other consumer loans, rose to 3.78% from 3.69% late Wednesday.

The Fed has been raising rates aggressively in order to tame inflation by applying the brakes to the economy. Investors have been hoping that more signs of easing inflation could help the central bank shift to less aggressive rate increases.

The central bank, though, has been clear about its intent to keep raising rates, possibly to unexpectedly high levels, to tame inflation. James Bullard, who leads the Federal Reserve Bank of St. Louis, reaffirmed that position in a presentation on Thursday.

Stock markets “got a little bit ahead of themselves” after getting encouraging reports on consumer and wholesale prices easing a bit, said Ross Mayfield, investment strategist at Baird. “But, the Fed knows they have a long way to go.”

The Fed has already raised its short-term rate to a range of 3.75% to 4%, up from nearly zero as recently as last March. Bullard suggested that the rate may have to rise to a level between 5% and 7% in order to quash stubbornly hot inflation.

“When you have the (Fed) statement already laying it out and someone like Bullard saying what he said, there is a little bit of jawboning markets back down and letting investors know this fight is not over.”

The presentation from Bullard follows reports showing that inflation is starting to ease somewhat, but still remains extremely hot as consumers continue spending amid a very strong jobs market. Strong spending and employment remain a potential bulwark against the economy slipping into a recession. It also means the Fed will likely remain aggressive and raises the risk that it will hit the brakes hard enough on the economy to actually bring on a recession.

Outside of concerns about inflation, the market is also worried about Russia’s war in Ukraine and lockdowns in China hurting the global economy.

The conflict in Ukraine has been weighing on the energy sector and any worsening could cause spikes in prices for oil, gas and other commodities that the region produces. U.S. oil prices fell 4.1%.

China’s “zero-COVID” approach has caused a supply crunch for some of Asia’s biggest manufacturers, denting economic growth.

Markets in Asia and Europe fell.

Companies are also wrapping up the latest round of earnings reports. Macy’s jumped 15.1% after beating analysts’ quarterly financial forecasts and raising its earnings outlook.

Retailer Bath & Body Works soared 25.9% after reporting strong financial results.

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Yuri Kageyama, Matt Ott and Christopher Rugaber contributed to this report.

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