The stock market opened Thursday with steep losses in the wake of the Federal Reserve’s decision to hike interest rates at the fastest pace in nearly 30 years.
The Dow Jones Industrial Average was down nearly 800 points, a decline of 2.6 percent, and fell below 30,000 points shortly after the market opened.
The Nasdaq composite plunged 4.1 percent in the same time and the S&P 500 index was down 3.3 percent. All three major indexes are more than 20 percent below their most recent yearly highs, which is the formal threshold for a bear market.
The market’s steep Thursday selloff came a day after the Fed announced it would hike its baseline interest rate range by 0.75 percentage points for the first time since 1994. Though Fed leaders signaled for months that they’d hike rates only by 0.5 percentage points in June, an alarming May surge in inflation and rising consumer expectations of inflation to come pushed the bank to move quicker.
While markets closed with gains Wednesday after the Fed’s announcement, the subsequent selloff reflects deepening concern about the impact of higher borrowing costs on the U.S. economy.
“U.S. stocks are very weak, continuing a fairly common pattern of a reversal of a move on a Fed day, which saw equities rally yesterday after the Fed raised rates,” wrote analysts at Charles Schwab in a Thursday research note.
Interest rate hikes tend to quash stock market gains as higher borrowing costs prompt more consumers to save money rather than invest it in riskier assets. Business profit margins also tend to narrow as their borrowing costs increase and consumer spending slows under the weight of higher interest rates.
Investors and economists are also becoming increasingly concerned with how fast the Fed must raise interest rates to say ahead of inflation. While Powell expressed hope Wednesday that the Fed could achieve a relatively soft landing, he acknowledged it was becoming more difficult to do so due largely to factors beyond the bank’s control.
While the Fed can help tamp down demand for goods and services, higher interest rates cannot increase the supply of oil, wheat, fertilizer and other crucial commodities hindered by the war in Ukraine and economic sanctions imposed on Russia. Rate hikes will also have no positive impact on severe COVID-19 lockdowns in China behind inflationary supply chain snarls.
“The environment has become more difficult in the past four or five months and hence the need for the policy actions we took today,” Powell said Wednesday.
Experts fear that the Fed may need to raise interest rates high enough to bring the U.S. economy to a standstill to stop inflation from rising, which the central bank has done several times after price growth ran beyond its control. While Powell insisted the Fed was not trying to induce a recession, he acknowledged the Fed would need to raise rates high enough to restrain the economy to ensure inflation fell.
“With inflation at 40-year highs, we think that policy is going to need to be restrictive, and we don’t know how restrictive,” Powell said.
The Fed’s rate hikes have already slowed activity in the housing market, which had set records for both home sales and home price growth through much of the COVID-19 pandemic. Mortgage rates have risen significantly since the beginning of the year as the Fed raises interest rates and financial markets anticipate higher inflation.
Interest payments for the U.S. benchmark 30-year-fixed rate mortgage rose at the fast weekly pace in 35 years, hitting 5.78 percent as of Thursday. A monthly mortgage payment on a roughly median-valued $400,000 home would now be $1,874 after a 20 percent down payment up more than $500 last year.
Higher interest rates should theoretically help bring inflation down by slowing the pace of home sales, which would also reduce the significant consumer spending on moving services, new furnishings, and renovations that come with buying a house. But rising borrowing costs will also slow the pace of housing construction and could deepen a dire national shortage of affordable housing that long preexisted the COVID-19 pandemic.
Updated at 12:56 p.m.