Stocks on Wall Street decline as Fed Chair Jay Powell suggests more rate adjustments are necessary

Wall Street stocks opened lower on Wednesday following remarks from Federal Reserve chair Jay Powell suggesting that US interest rates will need to increase to control inflation.

The S&P 500, the benchmark for Wall Street, dropped 0.6% at the start of trading, and the tech-focused Nasdaq Composite fell 1%, indicating potential losses for both indices for the third straight session.

The decline followed the release of Powell’s semi-annual testimony to the House financial services committee, in which he stated that the Federal Reserve’s efforts to tighten monetary policy still have a long way to go in order for the economy to slow down enough to reach the 2% inflation target.

Last week, the central bank chose to maintain the federal funds rate at a range of 5% to 5.25%, but signaled the expectation of two additional rate hikes later in the year. 

Data compiled by Refinitiv, based on interest rate derivatives prices, suggests a 74% probability of another quarter-point rate increase at the next policy meeting in July. This has caused the dollar, which typically strengthens in anticipation of higher rates, to gain 0.1% against six other major currencies.

Francesco Pesole, FX strategist at ING, commented, “A successful rate-cut pushback this week by Powell can offer the dollar some support in the near term, but the greenback is set to remain overwhelmingly more sensitive to data as market pricing remains unanchored from the Fed’s projections.”

In Europe, the region-wide Stoxx 600 index dropped 0.5%, while France’s Cac 40 fell 0.6% and Germany’s Dax lost 0.4%.

Official data in the UK revealed that the annual rate of consumer price inflation remained at 8.7% in May, surpassing analysts’ expectations of 8.4%. This reinforces the belief among investors that the Bank of England is far from ending its tightening cycle.

Core inflation, which excludes volatile food and energy prices, increased to 7.1% in May, up from 6.8% in the previous month.

Futures markets indicate a slightly higher than 50% probability of a 0.25 percentage point increase in interest rates by the Bank of England, which currently stands at 4.5%, at Thursday’s policy meeting. However, the chances of a larger half-point rise have increased.

“I don’t think inflation is high enough to significantly increase the chances of a 50 basis point increase tomorrow, but it certainly raises the risks of hikes beyond 5% in August,” stated Imogen Bachra, head of UK rates strategy at NatWest.

Yields on two-year gilts, which are influenced by interest rate changes, rose by 0.17 percentage points to 5.11%, while the benchmark 10-year yield increased by 0.11 percentage points to 4.5%. Bond yields rise as prices fall.

The pound initially strengthened by 0.3% against the dollar, trading at $1.28, before retreating to $1.27.

London’s FTSE remained flat but experienced a 1.5% decline in real estate stocks as “rising interest rate expectations have pushed up monthly mortgage payments, which will contribute to a slowdown in trading activity and house prices this year,” explained Tom Bill, head of UK residential research at Knight Frank.

In Asia, equities traded lower, with China’s CSI 300 stock index dropping 1.5% and Hong Kong-listed mainland firms on the Hang Seng China Enterprises index falling 2%.