The S&P 500 sold off sharply on Tuesday night, after comments from Fed chair Jerome Powell argued why interest rates may need to be higher for longer.
In a speech made on Tuesday, Federal Reserve (The Fed) Chairman Jerome Powell warned interest rates are likely to head higher than policymakers were expecting, as stubbornly high inflation remains.
This took its toll on the major US Indexes with the S&P 500 closing down 1.5%.
The tech heavy Nasdaq composite fell 1.3%, while the Dow Jones Industrial Average was the most impacted, falling 1.7%.
All 11 major S&P sectors closed lower, with financials falling the furthest (down 2.5%), while the more inflation resilient consumer staples fell the least, down 0.97%.
Powell’s comments spark sell-off
There’s an old saying in markets that “you can’t fight the Fed”.
And today’s sell-off was in direct response to this.
During a Senate Banking, Housing and Urban Affairs Committee on Tuesday Federal Reserve chair Jerome Powell came out saying the central bank will need to do more to fight inflation.
“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” the U.S. central bank chief said in his semi-annual testimony before the Senate Banking Committee.
While pointing out that warmer weather over the holidays and other seasonal effects might be explaining the stronger than anticipated financial data, Powell says it might be a sign that the Fed hasn’t gone far enough on rates.
In fact, he points out this could be in the form of rate rises.
“If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,” Powell said.
The Federal Reserve has already raised their benchmark interest rate eight times over the past year, lifting the country’s official cash rate to 4.50%-4.75%.
But the comments sparked the market, which is now expecting interest rates to go even higher.
As the share market sold off, CME Group’s FedWatch calculator now has a 70% chance that rates will rise by 50 basis points, when the bank meets next.
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