Some analysts expected Powell to dismiss that talk in Friday’s speech, and he responded. His speech followed remarks by several other Fed officials, who also pushed back on speculation that the Fed might act less aggressively or even “pivot.”
“He basically said there’s going to be pain and they’re not going to stop and they’re not going to be able to stop walking until inflation comes down a lot,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments.
Powell acknowledged that the increases will hurt American households and businesses, perhaps in an unspoken nod to the potential for a recession.
But he also said the pain would be much greater if inflation was allowed to grow and that “we have to keep going until the job is done.”
He was speaking at an annual economic symposium in Jackson Hole, Wyoming, which in the past has been the scene of market-moving Fed speeches.
The selloff capped a week of choppy trading that left the major indexes down 4% or more for the week.
Overall, the S&P 500 fell 141.46 points to 4,057.66. The benchmark is down almost 15% for the year.
The Dow lost 1,008.38 points to close at 32,283.40. The last time the chip average fell by 1,000 points was in May.
The Nasdaq fell 497.56 points to 12,141.71, its biggest drop since June.
The Russell 2000 index of smaller companies fell 64.81 points, or 3.3%, to end at 1,899.83.
Stocks continue to post solid gains for the third quarter, with the S&P 500 up 7% and the Nasdaq up 10%.
The latest earnings reports were better than some analysts expected, and there are signs that inflation may have peaked, although it remains at very high levels.
The Fed accepts slower growth
Still, Powell’s speech made clear that the Fed will accept weaker growth for a while in order to control inflation, analysts said.
“Powell reiterated that the Fed is concerned about rising prices and controlling inflation is obviously job number one,” said Jeff Klingelhofer, co-chief investment officer at Thornburg Investment Management.
Perhaps giving investors some hope, some analysts said Powell appeared to signal that expectations for future inflation are not skyrocketing. If this were to happen, it could lead to a self-perpetuating cycle that worsens inflation.
A report on Friday said US consumers expect annual inflation of 2.9% over the long term, which is at the lower end of the 2.9% to 3.1% range seen in the survey from the University of Michigan during the senior year.
For now, the debate on Wall Street is whether the Fed will raise short-term rates next month by half a percentage point, double the usual margin or three-quarters of a point. The Fed’s last two hikes have been 0.75 points, and a slight majority of bets on Wall Street favor a third such hike in September, according to CME Group.
Inflation indicators soften
A report on Friday morning showed that the Fed’s favorite gauge of inflation slowed last month and was not as bad as many economists expected.
It’s a potentially encouraging sign, which may encourage more Wall Streeters to say the worst of inflation is over or will soon be over.
Other data showed Americans’ incomes rose less last month than expected, while growth in consumer spending slowed.
After the reports and Powell’s comments, the two-year Treasury yield rose for much of the day, but fell in the afternoon to 3.36% from 3.37% late Thursday. It tends to track expectations for Fed action.
The yield on the 10-year Treasury, which tracks expectations for long-term economic growth and inflation, rose initially before falling to 3.02 percent from 3.03 percent late Thursday.
The Fed has already raised its overnight interest rate four times this year in hopes of curbing the worst inflation in decades.
The increases have already hurt the housing sector, where more expensive mortgage rates have slowed down activity. But the labor market has remained strong, helping to boost the economy.
Investors received a fresh set of warnings from companies about the lingering impact of inflation and the slowing economy. PC maker Dell fell 13.5% after it said weaker demand will hurt revenue. Chipmaker Marvell Technology fell 8.9 percent after giving investors a disappointing earnings forecast.
AP