Wall Street: US stocks plunge on fears that interest rates will stay high
Wall Street fell sharply in an ugly day for stocks worldwide on expectations that US interest rates will stay high well into next year.
The S&P 500 lost 1.6 per cent for its worst day since March.
That followed a drop of 0.9 per cent from Wednesday after the Federal Reserve indicated it may cut interest rates next year by just half of what it had earlier predicted.
The Fed has already hiked its main interest rate to levels unseen since 2001, which helps slow inflation but at the cost of hurting investment prices.
High-growth stocks are typically among the hardest hit by high rates, and Big Tech stocks took the brunt of the pain for a second straight day.
The Nasdaq composite dropped 1.8 per cent as Amazon fell 4.4 per cent , Nvidia dropped 2.9 per cent and Tesla lost 2.6 per cent . The Dow Jones Industrial Average dropped 370 points, or 1.1 per cent .
Stock prices tend to fall when rates rise because stocks are riskier investments.
A 10-year Treasury is offering a yield of 4.48 per cent , up from 4.40 per cent late on Wednesday and from only 0.50% three years ago. It is near its highest level since 2007.
The two-year Treasury yield, meanwhile, wavered following some mixed reports on the economy. It slipped to 5.14 per cent from 5.17 per cent late on Wednesday after climbing earlier in the morning.
One report showed fewer US workers applied for unemployment benefits last week than expected. It was the lowest number since January and the latest signal of a remarkably resilient job market.
Such a solid labour market helps calm worries about a possible recession but it may also give US households fuel to keep spending, which could encourage companies to try to raise prices further and keep upward pressure on inflation. That in turn could give the Fed more reason to keep rates higher for longer.
A separate report suggested manufacturing in the mid-Atlantic region is contracting by much more than economists expected. A third report showed sales of previously occupied US homes were weaker last month than economists expected.
Interest rates may stay high if the Federal Reserve follows through on the latest forecasts from its policy-making officials.
Policy makers have indicated they could raise the federal funds rate one more time this year, and then cut it by only half a percentage point from there through 2024.
Three months ago, Fed officials were forecasting a full percentage point of cuts could be the most likely path. They want to ensure inflation gets back down to the Fed’s target of 2 per cent.
Wednesday’s projections may be an indication that “raises the bar for rate cuts next year”, according to Goldman Sachs economist David Mericle. He pushed out his forecast for the first cut in interest rates to the final three months of 2024, after earlier thinking it could happen during the spring.
He sees the Fed on a path where it can “simply wait until something goes wrong and then deliver either small cuts in response to a smaller growth threat, similar to the insurance cuts of 2019, or substantial cuts in response to a full recession”, he wrote in a report.
Press Association – Stan Choe