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 0.7% after hitting an all-time high in the previous session. The tech-heavy Nasdaq Composite erased earlier gains and traded 0.5% lower.
Ten out of 11 S&P 500 sectors traded in the red, led to the downside by communication services and utilities.
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.”
Chairman Jerome Powell will hold a press conference at 2:30 p.m. ET.
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.
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. This has prompted some, including Paul Tudor Jones, to call for the central bank to re-think its easy monetary policy.
Treasury Secretary Janet Yellen, who is testifying before the Senate Finance Committee Wednesday, said higher price pressures shouldn’t last over the long run.
“I previously said that I see important transitory influences at work and I don’t anticipate that it will be permanent,” Yellen said. “But we continue to monitor inflation data very carefully, and importantly for the long run inflation outlook we see inflation expectations by most measures … as being well-anchored.”
Economic reopening plays provided the broader market with some support. Major airline stocks American Airlines, United and Delta all traded higher. 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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