Wall Street slips due to high inflation, creates interest rates

The inflation report landed on Wall Street along with a slew of other data that painted a mixed picture of the economy.

Fewer workers filed for unemployment benefits last week than expected, a sign that layoffs remain low across the economy. This is good news for workers and another sign of strength for the job market, but the Fed fears it could also increase upward pressure on inflation.

Meanwhile, other reports showed that an index of manufacturing activity in the Mid-Atlantic region fell this month, while homebuilders built fewer homes last month than economists had expected.

Overall, the reports cast doubt on Wall Street’s hopes that the Federal Reserve could walk the tightrope of slowing the economy just enough to stamp out inflation, but not enough to trigger a deep recession.

The Fed has already raised its key federal funds rate to a range of 4.50 percent to 4.75 percent, from virtually zero a year ago. It has said it expects to push through a few more hikes before rates are kept high at least until the end of this year.

The strong recent reports on inflation and jobs have forced Wall Street to adjust its rate forecasts closer to the Fed’s. There was a major split between them earlier this year. Investors were betting that the Fed would not hike as high as it had announced while harboring significant hopes of a rate cut in the second half of the year.

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The fear now is that if inflation turns out to be higher than expected, the Fed will have to go beyond what it has prepared the market for.

Loretta Mester, President of the Federal Reserve Bank of Cleveland, said in a speech Thursday that she saw “a compelling economic case” at the Fed’s meeting earlier this month to hike rates twice as much, which it ended up doing . The Fed raised its federal funds rate by 0.25 percentage point on Feb. 2, the latest downgrade from previous hikes of 0.50 and 0.75 percentage points.

Some Wall Street stocks bucked the broader downtrend after reporting stronger-than-expected gains for the most recent quarter. Network giant Cisco Systems was up 6.3 percent, and waste management company Republic Services, for example, was up 3.7 percent.

However, large tech stocks helped lead the overall market lower as they are seen as some of the most vulnerable to higher interest rates. In previous years, their stocks shot up in part because of record-low interest rates.

A 1.4 percent drop for Microsoft and a 1.6 percent drop for Nvidia were some of the heaviest weights in the S&P 500.

AP

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