On Tuesday, stocks fell after a government report showed that inflation remained undesirably high last month, a setback for investors who had bet that the Federal Reserve could cut short-term interest rates as early as March.
The Dow Jones Industrial Index continued to close down after losing more than 700 points in afternoon trading and closed down 525 points, or 1.4%, at 38,273. The S&P 500 ended the day down 1.4%, while the tech-heavy Nasdaq Composite index lost 1.8%.
Financial markets have risen steadily since October on expectations that the Fed has completed its efforts to raise interest rates to rein in inflation, with some Wall Street analysts predicting that the central bank could cut its short-term rate as early as March. However, investor sentiment is shifting amid the strong performance of the US economy and efforts by Fed officials to dampen expectations of an imminent rate cut.
“A market that previously expected a rate cut quickly has been reinforced following a series of rate cuts throughout the year and has had to digest not only the constant Fed talk but also the fact that the Fed has yet to declare victory in its efforts to rein in inflation,” Quincy Krosby, chief global strategist at LPL Financial, said in an email.
Consumer prices rose 3.1% in January from the same period last year, the Labor Department said on Tuesday. While that was lower than in December, economists had expected prices to rise 2.9% from a year earlier. Job growth across the US also came in above forecasts last month, suggesting that economic growth may still be too strong to push inflation closer to the Fed’s 2% target rate.
Fed Chairman Jerome Powell said in January that “inflation remains high… and the path forward is uncertain” and that they would be cautious with rate cuts.
Most analysts continue to expect a gradual slowdown in price increases, although some economists are concerned that inflation could accelerate again.
“Until proven otherwise, the longer-term cooling trend is still in place,” said Chris Larkin, head of trading and investment at Morgan Stanley’s E-Trade. “The Fed has already made it clear that rate cuts won’t happen as fast as many would like. Today was just a reminder of why they are inclined to wait.”
Wall Street analyst Adam Crisafulli of VitalKnowledge thinks it’s a matter of when, not if, the Fed moves to cut interest rates. “The story that has supported stocks since [November] is still going on,” he said in a note to investors, pointing to the continued slowdown in inflation and healthy corporate earnings.
The Fed started boosting rates in March of 2021 in a bid to temper the hottest inflation in four decades. Economists say that effort, which involved 11 consecutive rate hikes, has to date largely succeeded in lowering costs, although millions of Americans continue to feel the impact of higher prices for food, rent, and other products and services.
—The Associated Press contributed to this report.
