Stocks slip as stubborn inflation stays

Traders expecting Fed will still raise interest rates aggressively

NEW YORK — Most stocks marched lower Wednesday as stubbornly sticky inflation has Wall Street bracing for interest rates to stay higher for longer.

The S&P 500 fell 0.5 percent in its first trading after coming off a frigid February. The Dow Jones Industrial Average edged up by 5 points, or less than 0.1 percent, while the Nasdaq composite fell 0.7 percent.

After a hot start to the year, the stock market has struggled as data piled up to show inflation and the overall economy are remaining more resilient than expected. That forced many investors to delay their forecasts for a recession to later in the year, while also raising their expectations for how high the Federal Reserve will take interest rates.

Higher rates can drive down inflation, but they hurt the economy by making borrowing more expensive and raise the risk of a recession later on. They also drag down on prices for stocks and other investments.

Wall Street got another reminder of inflation’s stubbornness from the latest report to show that U.S. manufacturing is weakening. A report from the Institute for Supply Management said that a measure of prices paid rose in February and hit its highest level since September.

“The biggest risk to markets is an economy that stagnates yet continues to struggle with nagging inflation pressures,” said Jeffrey Roach, chief economist for LPL Financial, in a note to investors.

The market’s expectations have firmed for the Fed to stay aggressive in order to ensure inflation falls toward its 2 percent goal. Traders have pulled back bets that the central bank could cut rates later this year, and some have increased bets it may reaccelerate the pace of its hikes later this month.

The widespread expectation is now for the Fed to take its key overnight rate to at least 5.25 percent by June.

Some bets are also calling for the rate to top 5.50 percent, its highest level since 2001.

The rate is currently in a range of 4.50 percent to 4.75 percent after starting last year at basically zero.

Treasury yields rose immediately after the release of the manufacturing data. They had shot higher in February as expectations rose for the Fed and rates.

Several big-name retailers have already offered discouraging forecasts for the upcoming year given the challenges U.S. households are facing because of high inflation and other factors.