Dow drops more than 300 points after Fed sees inflation jump, rates increasing in 2023

Dow drops more than 300 points after Fed sees inflation jump, rates increasing in 2023

U.S. stocks dropped to their session lows on Wednesday after the Federal Reserve raised its inflation expectations and moved up the time frame on when it will hike interest rates next.

The Dow Jones Industrial Average turned sharply lower and last traded 320 points lower. The S&P 500 fell 0.9% after hitting an all-time high in the previous session. The tech-heavy Nasdaq Composite erased earlier gains and traded 1% lower as Alphabet, Facebook, Netflix and Microsoft all dropped at least 1%.

All 11 S&P 500 sectors fell into the red, led to the downside by tech, materials and consumer staples.

The policymaking Federal Open Market Committee indicated that rate hikes could come as soon as 2023, after signaling in March that it saw no increases until at least 2024.

The Fed also raised its headline inflation expectation to 3.4%, a full percentage point higher than the March projection, but the post-meeting statement continued to say that inflation pressures are “transitory.”

“This is not what the market expected,” said James McCann, Aberdeen Standard Investments’ deputy chief economist. “The Fed is now signaling that rates will need to rise sooner and faster … This change in stance jars a little with the Fed’s recent claims that the recent spike in inflation is temporary.”

The central bank gave no indication as to when it will begin cutting back on its aggressive bond-buying program. The Fed has been buying $120 billion worth of bonds each month as the economy continues to recover from the coronavirus pandemic.

Chairman Jerome Powell said at a press conference that the central bank with provide “advanced notice” before announcing their move to taper asset purchases.

“While reaching the standard of ‘substantial further progress’ is still a ways off, participants expect that progress will continue,” Powell said. “In coming meetings, the committee will continue to assess the economy’s progress toward our goals. As we have said, we will provide advance notice before announcing any decision to make changes to our purchases.”

The meeting came as inflation heats up, with producer prices rising at their fastest annual rate in nearly 11 years during May, a report on Tuesday showed.

Economic reopening plays provided the broader market with some support. Royal Caribbean and Carnival both climbed 2% after an upgrade from Wolfe Research.

On Wednesday, China said it will release industrial metals including copper, aluminum and zinc from its national reserves to curb commodity prices. Copper price has fallen more than 10% from its record high, dipping into correction territory on Tuesday.

— CNBC’s Jeff Cox contributed reporting.

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