Stocks fall as stubborn inflation pushes back Fed interest rate forecasts

Stock markets slumped on Tuesday as investors scaled back bets that the Federal Reserve will slow the economy in coming months after higher-than-expected inflation data led traders to expect interest rates to stay higher for longer.

The benchmark S&P 500 stock index fell over 1 percent in early trading. The index has suffered such a big loss on only one other day this year, as optimism about the economy’s resilience and corporate earnings continued to push stocks to new highs.

Investors still expect the Fed to bring inflation back to manageable levels without causing too much damage to the overall economy. However, that forecast was pressured on Tuesday by a consumer inflation report that showed prices rose faster than forecast.

Consumer data “came out stronger than the Fed or the market wanted or expected,” said Greg Wilensky, head of U.S. fixed income at Janus Henderson Investors.

The longer inflation remains elevated, the longer the Fed is likely to delay rate cuts, tightening the screws on an economy that is already showing early signs of weakness and dampening enthusiasm on Wall Street.

Stuart Keizer, equity analyst at Citi, said the inflation data was “not a game changer” but would likely lead to a short-term cut in the stock market as investors scale back their hopes of interest rate cuts. “The pressure today was clearly not good,” he said.

Earlier this year, investors thought it likely that the Fed would begin cutting interest rates next month after a sustained, if bumpy, decline in inflation. Investors have now abandoned their bets on a rate cut in March and pushed expectations beyond the Fed’s May meeting to the next one in June.

“A cut in March is completely off the agenda,” said Seema Shah, chief global strategist at Principal Asset Management. “But May could still be in play if economic activity plays along and finally starts to show the impact of previous Fed tightening measures.”

Investors and analysts were keen to ensure that a single inflation report would not dash hopes that the economy would avert a severe recession.

A survey of fund managers released Tuesday by Bank of America showed optimism reached its highest level since April 2022, shortly after the Fed began raising interest rates. This is supported by the fact that investors are pouring cash into stock markets around the world, with allocations to US stocks at their highest since November 2021, according to the survey.

But some investors worry that the economy will not yet feel the full impact of the Fed’s rate hikes, raising the risk that a delay in rate cuts could cause the economy to enter a downturn.

The Russell 2000 index, which tracks a wide range of smaller companies closely tied to the health of the domestic economy, fell about 3 percent on Tuesday after posting record gains in recent trading sessions.

If the index sustains these losses until the end of the day, it will be the worst daily performance of the year.


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Jennifer Adams

Dedicated news writer with a passion for truth and accuracy. Covering stories that impact lives.

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