Stocks slid on Friday, with the S&P 500 heading for its third consecutive weekly decline, a drop that came as Wall Street quickly changed its expectation for how aggressively the Federal Reserve will raise interest rates.
The S&P 500 fell 1.9 percent in early afternoon trading, a loss that would be its worst daily decline since early March. The technology heavy Nasdaq composite fell 1.9 percent.
Friday’s selling added to a drop that began the day before, after the Fed chair, Jerome H. Powell, sealed expectations that the central bank would raise interest rates by a half a percent when it meets next month. Mr. Powell said an increase of that size “will be on the table for the May meeting,” as he repeated the view that persistently high inflation meant the Fed had to move fast to raise borrowing costs and cool down the economy.
The central bank raised interest rates by a quarter of a percentage point in March, after having held them near zero since March 2020, but stock investors have been contending with the prospect of higher interest rates since the start of the year — rethinking their appetite for risky assets, like stocks, as well as their forecasts for economic growth.
But recent comments from Fed officials, including Mr. Powell, have fueled expectations that interest rates will climb far faster than anyone thought even a few weeks ago. Traders in futures markets currently expect the Fed to raise its benchmark rate to 2 percent in July, a forecast that would require the central bank to hike by half a percent at each of its next three gatherings. A month ago, the odds that rates would be at 2 percent in July stood at zero.
The expectation is also evident in the bond market, where government bond yields have jumped. The yield on 10-year U.S. Treasury notes, a benchmark for borrowing costs across the economy, is up to 2.91 percent, a sharp increase from 1.51 percent at the start of the year.
The odds of an aggressive rate path increased following Mr. Powell’s comments yesterday, but they’ve also edged higher as other officials have argued for a faster approach to cooling down inflation. In early April, details of the Fed’s March meeting showed that central bankers were preparing to raise interest rates “expeditiously.”
The change is a “major adjustment” for investors, and one that comes with the risk that the Fed will go too far in slowing the economy, potentially triggering a recession, Louis Navellier, the founder of the money manager Navellier & Associates, wrote in a note.
“While fighting inflation is in everyone’s best long-term interests, there is healthy skepticism that the Fed and other central banks can thread the needle of a soft landing,” he wrote.
Mixed reactions to corporate earnings reports from several companies have also prompted the stock market’s downward turn on Friday.
HCA Healthcare fell 18 percent, making it one of the worst performers in the S&P 500, after the company cut its forecast amid higher labor costs. Universal Health Services was down 12 percent, while Intuitive Surgical fell nearly 14 percent.
Verizon fell about 5.8 percent, after the company said it lost 36,000 phone subscribers in the first three months of the year.