The Fed hiked rates by a half a percentage point Wednesday afternoon, and some investors believed the central bank would move cautiously after that because of fears about an economic slowdown. That led to a huge, but fleeting, stock market rally, with the Dow Jones closing up 932 points, or 2.8 percent.
Those gains evaporated on Thursday, however, amid renewed fears about the economy’s ability to regain momentum after it shrank in the three months of 2022.
Tech stocks that powered many of the indexes slumped: Apple fell 5.6 percent, Google lost 4.8 percent and Amazon dropped 7.6 percent. (Amazon founder Jeff Bezos owns The Washington Post.)
Risk-averse investors backed off cryptocurrencies. Bitcoin and Ethereum each fell more than 8 percent.
“Thursday’s stock selloff suggests that Wednesday’s … market action was a relief rally,” said Zach Stein, chief investment officer at asset management firm Carbon Collective. “We are still not out of the woods yet, as there is still too much uncertainty over how the Federal Reserve’s actions will tame inflation without causing a recession. The concerns that triggered the stock market correction over the past few months, such as inflation, the Russia and Ukraine war and surging oil prices, are still with us and haven’t been resolved yet.”
The Dow finished the day with a 3.1 percent slump to finish at 32,997. The S&P 500 index sank 153 points, or 3.6 percent, while the tech-heavy Nasdaq was the biggest loser, giving back nearly 650 points, or 5 percent.
Traders looking for safer bets pushed up the yield on 10-year Treasury note to 3.04 percent, it’s highest mark since 2018.
The wild midweek swings, experts said, signified the challenges facing the economy as it attempts to emerge from the coronavirus pandemic. In the early days of the pandemic, stimulus payments and interest rate cuts flooded the economy with cash and credit to prop up struggling households and businesses.
Now the federal government is employing a much different strategy, curtailing federal assistance and raising rates. That is pulling the economy in different directions, with inflation spiking and growth slowing, but hiring remaining robust.
Some of those forces helped bring an estimated 1.5 million retirees back into the U.S. labor market over the past year, according to an analysis of Labor Department, somewhat loosening the hiring market and tempering wage gains, though private-sector average hourly earnings have continued to edge upward.
The Fed’s interest rate hike on Wednesday — the second of seven that are forecast for 2022 — could make borrowing more expensive for corporations and households. This is supposed to ease inflationary pressures. But Fed officials are attempting to raise interest rates at such a pace that it doesn’t completely smother economic growth, a difficult balance to strike. If the economy cools too quickly, it could fall into a recession, generally defined as two consecutive quarters of decline.
Those were among the concerns leading investors to sell off stock market investments on Thursday.
“Soft landings are hard to pull off in monetary policy,” said Nancy Davis, founder of asset management firm Quadratic Capital Management.
“To stabilize the market, we need to see a weaker jobs report [on Friday],” said Chris Rupkey, chief economist at market research firm FWD Bonds. “The market needs something, anything in that report, maybe it’s wages, that will tell the Fed to stop raising rates or at least slow the rate hikes pace down.”
Domestic markets have also thrown a wrench in the plans. April was the worst month for the S&P 500 since March 2020 and capped its worst start to the calendar year since World War II.
Rachel Siegel contributed to this report.