Stocks on Wall Street slid on Monday, with the S&P 500 dropping by the most it has in over two months, as a speech this week by Jerome H. Powell, the Federal Reserve chair, loomed over investors who are focused on the path for interest rates in the months ahead.
The benchmark index fell 2.1 percent, its sharpest daily decline since June 16. The tech-heavy Nasdaq composite dropped 2.5 percent, nearly erasing its gains for August.
The stock market has been reversing some of its recent rebound, gains that had been fueled by a batch of better-than-expected corporate earnings reports and a report that inflation had cooled in July. Monday’s drop followed a small decline last week, which came on the heels of four consecutive weekly gains that had lifted the S&P 500 more than 17 percent.
The sudden swing shows that investors recognize they’re still not out of the woods when it comes to the Fed, recalling the sting of soaring inflation and a series of large interest rate increases by the Fed this year that helped push stock prices sharply lower. The inflation reading for July, which showed that gains in consumer prices steadied from the month before, had spurred hopes that the central bank might ease off its campaign to raise borrowing costs.
But it has dawned on investors that such a conclusion was premature, said Victoria Greene, chief investment officer at G Squared Private Wealth.
“People are coming back to reality that the world is still a very uncertain place,” she said.
A speech by Mr. Powell on Friday, at a gathering of central bankers at Jackson Hole in Wyoming, could help clarify the Fed’s expectations for inflation. Economists will listen for clues on whether the Fed will make another three-quarter-point increase in interest rates at its September meeting or go with a half-point increase.
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.
What causes inflation? It can be the result of rising consumer demand. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.
Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains can lead to higher wages and job growth.
How does inflation affect the poor? Inflation can be especially hard to shoulder for poor households because they spend a bigger chunk of their budgets on necessities like food, housing and gas.
Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.
Monday’s trading reflected worries that policymakers might choose the more aggressive approach. Large jumps in borrowing costs help contain inflation by slowing the economy, but they also make it harder for companies to grow and more expensive for consumers to borrow and spend.
On Monday, a survey from the National Association for Business Economists showed that nearly three-quarters of corporate economists were skeptical that the Fed could reach its 2 percent inflation target in the next two years without bringing on a recession. Fifty-two percent of respondents said they were “not very confident” in the Fed’s efforts to fight inflation, and 21 percent said they were “not at all confident.”
“The concern is that the Fed is now going to go out of their way to remind people that they’re still going to hike rates,” Ms. Greene said.
Several of the central bank’s policymakers have suggested this month that the Fed remains determined to get inflation under control and is likely to keep pushing borrowing costs higher until it has done so.
The pessimistic mood on Monday affected other markets, too. Yields on government bonds rose, with the yield on 10-year Treasury notes climbing above 3 percent for the first time since July 20. The yield on two-year notes jumped to 3.32 percent.
Understand Inflation and How It Affects You
- Inflation Calculator: How you experience inflation can vary greatly depending on your spending habits. Answer these seven questions to estimate your personal inflation rate.
- Managing Your Finances: With interest rates rising, now is a good time to pay down credit card balances and bolster emergency savings.
- Cost of Living: As food prices rise, eating is becoming increasingly expensive. We took a close look at five New Yorkers’ food and drink habits to see where the effects are most felt.
- Inflation Vanguard: Inflation has been worse in Southern cities. What can their struggles teach the rest of the country?
The price of Bitcoin, the largest cryptocurrency, fell more than 2 percent to $21,084. The cryptocurrency is down more than 54 percent since the beginning of the year.
In Europe, the Stoxx 600 fell nearly 1 percent, leaving the overall index down over 22 percent since the start of the year. The drop came as the price of natural gas in Europe surged more than 14 percent after Gazprom, Russia’s state-owned energy company, announced that the Nord Stream 1 pipeline, a major supplier of natural gas to Europe, will halt production for three days starting Aug. 31.
Hong Kong’s Hang Seng fell about 0.6 percent, and Tokyo’s Nikkei 225 dropped around 0.5 percent.
China’s central bank said on Monday that it was cutting its five-year interest rate by 0.15 percentage points, to 4.3 percent, a moved that could bolster the country’s real estate sector. The central bank also said it was reducing a one-year interest rate by 0.05 percentage points, to 3.65 percent.