MANHATTAN (CN) — Suffering one of its worst weeks in months, Wall Street pulled back from gains earlier this winter amid data and comments from Federal Reserve officials that show inflation is not leaving as quickly as hoped.
By the closing bell on Friday, the Dow Jones Industrial Average lost 1,009 points while the S&P 500 dropped 109 points and the Nasdaq fell 393 points. Most of the losses came Monday and Friday on the heels of crucial inflationary reports, with indices treading water during the middle of the week.
On Friday, the personal consumption expenditures index released by the U.S. Bureau of Economic Analysis noted that PCE increased by 1.8% in January, or by $312 billion. Excluding food and energy, the PCE priced index rose by 0.6% last month, driven mostly by the 0.4% increase in food prices.
Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance, says the data proves it is “much too soon for the Fed to say ‘Mission Accomplished.’” He noted that investors had previously believed the Federal Reserve would raise rates twice more by a total of 0.5% to 0.75% before cutting rates by the end of the year.
That may no longer still be the case, he noted. “The Fed has much more work to do, and even if they only raise rates a couple more times, it is extremely unlikely that they will be cutting rates this year — as was consensus and in market-based pricing as recently as a few weeks ago,” Zaccarelli said.
What’s more, several Fed officials — most notably James Bullard and Loretta Mester — have hinted that the central bank will hike rates by 50 basis points during its March 22 meeting. “Even given the extent of the rise in rates and increase in Fed rate hike expectations already price in, there is still room for rates to rise further if data releases continue to surprise to the upside,” John Canavan, an analyst at Oxford Economics, wrote in an investor’s note on Friday.
After it meets in late March, the Fed is scheduled to convene again in early May, during which most experts believe they will finish their raft of interest rate hikes. The current rate for the overnight federal funds rate is 4.5% to 4.75%.
Experts now forecast the Fed could raise rates to 5.2% to 5.5% by mid-2023 and keep them there for the remainder of the year.
“Markets are now pricing in only about 10 [basis points] of rate cuts during the second half of this year after having priced in around 50bps of cuts this year in the wake of the FOMC meeting at the start of this month,” Canavan wrote. “That is moving closer toward our view that the FOMC will hold rates steady until early 2024 after they reach the terminal rate.”
Minutes from the last meeting of the Federal Open Markets Committee reinforced the belief that the Fed would continue apace with its interest rate hikes, to the tune of 25 basis points, at both the March and May meetings, but experts noted the minutes released on Wednesday were outdated due to a blockbuster jobs report and consumer spending report that came out after the last Fed meeting. By the end of that day’s trading, the Dow barely shed any points, opening at 33,169 points to close at 33,045 points.
Two days before the Fed minutes were released was a different matter. All three indices shed tremendous value, with the Dow losing 548 points and the S&P declining 80 points. The carnage continued into Tuesday, but fortunately markets were able to right themselves by that day’s closing bell.
“Investors had started the year on a positive note, hoping that the worst was behind us, but if inflation remains sticky — which is what we have been saying it will be since last year — then the market is going to continue to be volatile, and this year’s gains remain in doubt,” Zaccarelli said.
Earlier in the week, a larger-than-expected gain in producer prices also hampered Wall Street. The report found that producer prices gained 0.7% last month, with core producer prices increasing 0.6%, driven mostly by a large gain in gasoline demand.
Fortunately, on Friday the University of Michigan also put out its consumer survey, which found that consumer sentiment has inched up again this month, from 64.9 on the index in January to 67 in February. Consumer expectations increased as well, from 62.7 last month to 64.7 this month, with Joanne Hsu, the survey’s chief economist, surmising that Main Street’s optimism is growing amid lingering negativity.
“On the one hand, worries about rising unemployment have emerged for some amid layoff announcements,” she said in a statement. “On the other hand, labor markets continue to enjoy historic strength, supporting robust income growth.”
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