Dow plunges 500 points in sharp selloff after Fed vowed more aggressive rate hikes

Dow plunges 500 points in sharp selloff after Fed vowed more aggressive rate hikes than expected in push to bring down inflation

  • Wall Street ended Wednesday sharply down after a day of wild swings
  • Fed’s interest rate hike of 0.75 points to 3.25% was widely anticipated
  • But the central bank issued grimmer projections than investors expected 

Wall Street’s main indexes ended Wednesday’s session sharply down, after a day of wild swings driven by the Federal Reserve‘s latest policy announcement.

The S&P 500 lost 1.7 percent, as did the Dow Jones Industrial Average, which plunged 522 points to 30,183, while the Nasdaq Composite fell 1.8 percent. 

It followed Fed projections for future interest rate hikes that were higher than expected, and a warning from Chair Jerome Powell that it will be ‘very challenging’ to achieve a so-called ‘soft landing’ for the economy. 

The Fed, which on Wednesday raised its policy rate to the highest level since the 2008 financial crisis, is trying to control rampant inflation by cooling the economy, but hopes to avoid a sharp downturn in a difficult balancing act. 

The Dow Jones Industrial Average plunged 522 points Wednesday after a day of wild swings

The Dow Jones Industrial Average plunged 522 points Wednesday after a day of wild swings

Stock trader Peter Tuchman works on the floor of the New York Stock Exchange on Wednesday. Stocks dropped in the final hour of trading after the Fed announcement

Stock trader Peter Tuchman works on the floor of the New York Stock Exchange on Wednesday. Stocks dropped in the final hour of trading after the Fed announcement

The central bank’s latest 0.75-point interest rate hike, the third in a row, takes the policy rate to a range of 3 percent to 3.25 percent, a move that was widely expected.

But the Fed policymakers projected future rate hikes at a sharper pace than expected, saying the key rate will likely hit 4.4 percent by the end of the year and 4.6 next year before coming back down.

Those forecasts up from projections in June of 3.4 percent and 3.8 percent respectively, and sent markets gyrating wildly in afternoon trading. 

‘Markets were already braced for some hawkishness, based on inflation reports and recent governor comments,’ Yung-Yu Ma, chief investment strategist at BMO Wealth Management, told Reuters.

‘But it’s always interesting to see how the market reacts to the messaging. Hawkishness was to be expected, but while some in the market take comfort from that, others take the position to sell.’

The Fed is attempting to cool down the economy in order to tame rampant inflation , which remains stubbornly high at 8.3 percent — but as interest rates climb, the path to a so-called ‘soft landing’ is narrowing.

Fed Chair Jerome Powell admitted on Wednesday that achieving a soft landing will be 'very challenging'

Fed Chair Jerome Powell admitted on Wednesday that achieving a soft landing will be ‘very challenging’

The Fed's rate hike for September is seen above. It is the third consecutive 75bps hike

The Fed’s rate hike for September is seen above. It is the third consecutive 75bps hike

Economists are increasingly projecting a ‘hard landing’ marked by a sharp increase in unemployment, and Powell admitted on Wednesday that achieving a soft landing will be ‘very challenging’.

‘We have always understood that restoring price stability, while achieving a relatively modest…increase in unemployment would be very challenging,’ he said.

‘No one knows whether this process will lead to a recession, or if so, how significant that recession would be,’ he added.

Soaring consumer prices have been putting the squeeze on American families and businesses and are already a political liability for President Joe Biden , as he faces midterm congressional elections in early November.

But a sharp contraction of the world’s largest economy would be an even more damaging blow to Biden, to the Fed’s credibility and the world at large.

The Fed measures inflation using an alternate index, Personal Consumption Expenditures. The PCE is at 6.3% now, and FOMC members expect it to decline in the coming years

The Fed measures inflation using an alternate index, Personal Consumption Expenditures. The PCE is at 6.3% now, and FOMC members expect it to decline in the coming years

The Fed measures inflation using an alternate index, Personal Consumption Expenditures. The PCE is at 6.3% now, and FOMC members expect it to decline in the coming years

The Fed measures inflation using an alternate index, Personal Consumption Expenditures. The PCE is at 6.3% now, and FOMC members expect it to decline in the coming years

The Fed's 'dot plot' shows where policymakers expect future interest rates to go. Each dot represents the view of one member of the FOMC, but the specific member behind each dot remains anonymous

The Fed’s ‘dot plot’ shows where policymakers expect future interest rates to go. Each dot represents the view of one member of the FOMC, but the specific member behind each dot remains anonymous

The US economy has been flashing warning signs for some time, including six straight months of contraction in the first half of the year, meeting one informal definition of a recession — but Biden denies a recession has begun.

‘Focusing on the Fed’s interest rate decision totally misses what’s most important,’ said Morning Consult’s chief economist John Leer.

Leer noted that policymakers ‘significantly increased their projections for inflation, unemployment and interest rates over the next two years and lowered their GDP growth forecasts.’ 

‘Even the Fed is growing less confident in its ability to achieve a soft landing,’ he added.

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