Stocks drop the most since June 2020: Investors think the Federal Reserve will have to keep interest rates elevated longer to brink prices back to earth.
The disappointing data means traders are bracing for the Federal Reserve to ultimately raise interest rates even higher than expected to combat inflation, with all the risks for the economy that entails, analysts said.
Almost all of Wall Street came into the day thinking the Fed would hike its key short-term rate by a hefty three-quarters of a percentage point at its meeting next week, with smaller rate hikes in the following months. The thinking was that a slowdown in inflation would let the Fed downshift the size of its rate hikes through the end of this year and then potentially hold steady through early 2023.
"The market had been settling into a 'peak' mindset — peak inflation and peak Funds Rate expectations, and now investors are wondering whether both numbers don't have further to run on the upside," equity analyst Adam Crisafulli, head of Vital Knowledge, said in a note to investors.The inflation figures were so much worse than expected that traders now see a one-in-five chance for a rate hike of a full percentage point by the Fed next week.
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