Stocks suffered sharp declines during the morning session on Thursday, signaling that investors are growing restless after the Federal Reserve announced its biggest rate hike since 1994.
On Wednesday, central bank policymakers announced they would raise interest rates by 0.75%, their most aggressive move yet to control soaring inflation. Stocks surged thereafter, ending a five-day losing streak, with the Dow Jones jumping more than 300 points, or 1%; the S&P 500 climbing 1.5%; and the Nasdaq soared 2.5%.
Markets suffered heavy losses in the first half of 2022 as a volatile mix of inflation, shifting central bank policy, geopolitical upheaval and lingering global coronavirus concerns added to market uncertainty. The S&P 500 index remains in bearish territory, defined as a 20% decline from its most recent peak, while the Nasdaq is down about 30% year-to-date.
New jobless claims fell by 3,000 to a seasonally adjusted 229,000, according to new data released Thursday by the Labor Department, indicating that the number of Americans claiming unemployment benefits remained relatively flat for the year. A widely followed proxy for layoffs, the level of jobless claims will come under scrutiny for hints of a weakened labor market, as fears of a potential recession grow.
The Fed’s decision to raise interest rates was intended to cool the economy by dampening consumer spending. At higher rates, consumers will find prices for mortgages, auto loans and other financed purchases harder to come by. By discouraging people from spending their money, the Fed aims to temper demand, which would eventually force prices down and stabilize inflation.
But tinkering with interest rates can feel like a high-flying act.
Fed officials are scrambling to strike the right balance: lowering prices without slowing the economy too much, which can lead to mass layoffs and a recession, creating a potentially new set of problems on top of soaring price. Fed leaders have acknowledged that their more aggressive efforts to fight rising prices could cause a storm with harsher consequences.
We are not looking to put people out of work, of course. We never think too many people are working and fewer people need jobs, Federal Reserve Chairman Jerome H. Powell said Wednesday at a news conference following the decision. But we also believe that you really can’t have the kind of labor market that we want without price stability. We need to go back and establish price stability.
Downtrodden investors are also reacting to the central bank’s less optimistic projections. New figures released on Wednesday showed increased unemployment, reduced economic growth and inflation taking longer to subside.
The Fed expects the jobless rate to reach 3.7% by the end of the year and continue to rise to 3.9% in 2023, in anticipation of a slowdown in hiring and reduced consumer demand.
While growth is expected to be weaker, projections now call for an increase in the unemployment rate, said Bill Adams, chief economist at Comerica Bank. Still, Adams said if the slowdown turns into an outright recession, the Fed could reverse future rate hikes or end increases sooner than it had expected.
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