Markets off amid signs of another Fed rate rise

Stocks closed lower Thursday on Wall Street and Treasury yields rose after another indication from the Federal Reserve that it may need to raise interest rates much higher to control inflation than expected.

The S&P 500 fell 0.3%, with retailers and banks among the biggest weights on the benchmark index. The Dow Jones Industrial Average slipped less than 0.1%, while the Nasdaq composite closed 0.3% lower. Smaller company stocks fell harder than the rest of the market, pulling the Russell 2000 index 0.8% lower.

Bond yields rose and hovered around multidecade highs. The yield on the two-year Treasury note rose to 4.45% from 4.37% late Wednesday. The yield on the 10-year Treasury, which influences rates on mortgages and other consumer loans, rose to 3.77% from 3.69% late Wednesday.

The Fed has been raising rates aggressively to tame inflation by applying the brakes to the economy. Investors have been hoping that more signs of easing inflation could help the central bank shift to less aggressive rate increases.

The central bank, however, has been clear about its intent to keep raising rates, possibly to unexpectedly high levels, to tame inflation.

James Bullard, who leads the Federal Reserve Bank of St. Louis, reaffirmed that position in a presentation Thursday, suggesting the Fed’s shortterm rate may have to rise to a level between 5% and 7% to quash stubbornly hot inflation. The central bank has already raised its key rate to a range of 3.75% to 4%, up from nearly zero in March.

“Bullard’s comments this morning suggesting that they need to get the fed fund (rate) between 5% and 7% was a surprise, to say the least, to markets,” said Scott Ladner, chief investment officer at Horizon Investments. “That certainly was a shock to folks and pushed us further down.”

The S&P 500 fell 12.23 points to 3,946.56. The Dow dropped 7.51 points to 33,546.32. The Nasdaq lost 38.70 points to close at 11,144.96. The Russell 2000 index fell 14.04 points to 1,839.12. The major indexes are headed for weekly losses.

The presentation from Bullard follows reports showing that inflation is starting to ease somewhat, but still remains extremely hot as consumers continue spending amid a very strong jobs market.

Strong spending and employment remain a potential rampart against the economy slipping into a recession, but also mean the Fed will likely remain aggressive in its fight against inflation, raising the potential for a recession.

Stock markets “got a little bit ahead of themselves” after encouraging reports on consumer and wholesale prices easing a bit, said Ross Mayfield, investment strategist at Baird. “But, the Fed knows they have a long way to go.”

“When you have the (Fed) statement already laying it out and someone like Bullard saying what he said, there is a little bit of jawboning markets back down and letting investors know this fight is not over.”

Outside of inflation concerns, investors are also worried about Russia’s war in Ukraine and lockdowns in China hurting the global economy. The Ukraine conflict has been weighing on the energy sector, and any worsening could cause spikes in prices for oil, gas and other commodities the region produces. U.S. oil prices fell 4.6% on Thursday.

China’s “zero-covid” approach has caused a supply crunch for some of Asia’s biggest manufacturers, denting economic growth. Markets in Asia and Europe fell Thursday.

Companies, meanwhile, are wrapping up the latest round of quarterly earnings reports. Macy’s Inc. jumped 15% after beating analysts’ quarterly financial forecasts and raising its earnings outlook Thursday.