Dow tumbles more than 700 points on angst over hawkish Fed

Stocks closed sharply lower on Thursday, with each of the major averages suffering their biggest daily percentage drop in weeks, as fears intensified that the Federal Reserve’s battle against inflation using aggressive interest rate hikes could lead to a recession.

The Dow Jones Industrial Average tumbled 764.13 points, or 2.3%, to 33,202.22, the S&P 500 slid 2.5%, and the Nasdaq Composite fell 3.2%.

The central bank hiked rates by 50 basis points on Wednesday, slowing down from four back-to-back 75 bps hikes, although Fed Chair Jerome Powell said recent signs of weakening inflation have not brought any confidence yet that the fight had been won.

The Fed’s policy-setting committee projected it would continue raising rates to above 5% in 2023, a level not seen since a steep economic downturn in 2007.

“It is not just what they did but what they said, and it certainly does seem like they are still worried about inflation and this is not going to be the end of the rate increases,” said Melissa Brown, global head of applied research at Qontigo in New York.

“It really is hard to see what is going to turn things back around until we start seeing more data – which could be earnings, which could be the next inflation print or the Fed statement next year. The good news is it’s almost next year.”

Money market participants currently expect at least two 25 bps rate hikes next year and borrowing costs to peak at 4.9% in the first half, before falling to around 4.4% by the year end. 

Wall Street’s main indexes have staged a strong recovery since hitting 2022 lows in October on hopes of a less aggressive Fed, but the rally stalled in December on the back of mixed economic data and worrying corporate forecasts.

Investors also digested economic data on Thursday that showed a steeper-than-expected decline in retail sales in November and the number of Americans filing for unemployment benefits falling last week, indicating a tight labor market.

“Today’s data reinforces what Powell was saying yesterday that this is going to take time and the market seems to want to try and fast forward through the messy parts and it’s just not going to be able to do that because the Fed is not going to let it,” said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute.

The Bank of England and the European Central Bank also raised their key interest rate by 50 bps each and indicated an extended hiking cycle in a bid to tame spiraling inflation.

Shares of megacap companies which are sensitive to rising rates fell. Apple, Amazon and Microsoft dropped more than 3%.

Netflix slumped 8.6% after a media report that the entertainment services firm would let its advertisers take their money back after missing viewership targets.