Stocks dip as hike in interest rates looms

Stocks capped another shaky day on Wall Street with more losses Wednesday, after a highly anticipated report on inflation turned out to be even worse than expected.

The S&P 500 ended 0.4 percent lower, its fourth consecutive drop, after tumbling as much as 1.6 percent earlier. The Dow Jones Industrial Average fell 0.7 percent, while the Nasdaq composite dropped 0.2 percent, erasing nearly all of an early 2.1 percent loss.

Markets took a few U-turns through the morning, as has become the norm on Wall Street this tumultuous year. They were following the lead of Treasury yields in the bond market, which initially surged on expectations that Federal Reserve policymakers will hike interest rates drastically to slow the nation’s skyrocketing inflation.

“They seem to have a green light to raise interest rates with the labor market still in very good shape and inflation remaining well above where they want it to be,“said Tom Hainlin, national investment strategist at U.S. Bank Wealth Management.

Inflation and the Federal Reserve’s response to it have been at the center of Wall Street’s sell-off this year. Wednesday’s discouraging data showed that inflation is not only still very high, it’s getting worse.

The latest inflation data “certainly creates more certainty that the Fed is going to be pretty aggressive in the July meeting,” Hainlin said.

Traders are betting on a 67.8 percent chance of a full-point hike.

The risk is that rate hikes are a notoriously blunt tool, one that takes a long time for the full effects to be felt. If the Fed ends up too aggressive with them, it could cause a recession. In the meantime, higher rates push down on prices of all kinds of investments.

“Shock and awe from the Fed might cause a lot of collateral damage to the economy without really providing near-term inflation relief,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments.

All told, the S&P 500 fell 17.02 points to 3,801.78. The Dow dropped 208.54 points to 30,772.79, and the Nasdaq lost 17.15 points at 11,247.58.

Smaller company stocks also lost ground. The Russell 2000 slipped 2.15 points, or 0.1 percent, to 1,726.04.

In the bond market, the twoyear Treasury yield rose to 3.13 percent from 3.05 percent late Tuesday. It tends to follow expectations for Fed action, and it got as high as 3.22 percent immediately after the release of the report.

It remains higher than the 10year yield, which fell to 2.91 percent, down from 2.95 percent from late Tuesday. That’s a relatively rare occurrence, and some investors see it as an ominous signal of a potential recession.