The Dow Jones Industrial Average sank more than 1,250 points Tuesday, its steepest sell-off in more than two years, after a government report showed that inflation is maintaining a surprisingly strong grip on the U.S. economy.
The inflation figures were so much worse than expected that traders now see a one-in-three chance for a rate hike of a full percentage point by the Fed next week. That would be quadruple the usual move, and no one in the futures market was predicting such a hike a day earlier.
“The Fed can’t let inflation persist. You have to do whatever is necessary to stop prices from going up,” said Russell Evans, managing principal at Avitas Wealth Management. “This indicates the Fed still has a lot of work to do to bring inflation down.” Tuesday’s data puts hopes for such a “soft landing” under more threat. In the meantime, higher rates also push down on prices for stocks, bonds and other investments.
To be sure, the stock market’s losses only return the S&P 500 close to where it was before its recent winning streak. That run was built on hopes that Tuesday’s inflation report would show a more comforting slowdown. The ensuing wipeout fits what’s become a pattern on Wall Street this year: Stocks fall on worries about inflation, turn higher on hopes the Fed may ease up on rates and then fall again when data undercuts those hopes.
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