Stocks fall, yields rise as Fed details inflation efforts

Stocks closed lower and bond yields rose on Wall Street today after details from last month’s meeting of Federal Reserve policymakers showed the central bank intends to be aggressive in its efforts to fight inflation.

The S&P 500 fell 1%, adding to its losses from a day earlier. The Dow Jones Industrial Average dropped 0.4% and the Nasdaq slid 2.2%.

The minutes from the meeting three weeks ago reveal that Fed policymakers agreed to begin cutting the central bank’s stockpile of Treasurys and mortgage-backed securities by about $95 billion a month, starting in May. That’s more than some investors expected and nearly double the pace the last time the Fed shrank its balance sheet.

At the meeting, the Fed raised its benchmark short-term rate by a quarter percentage point, the first increase in three years. The minutes showed many Fed officials wanted to hike rates by an even bigger margin last month, and they still saw “one or more” such supersized increases potentially coming at future meetings.

“Essentially, the Fed has concluded that a good offense is the best defense,” said Sam Stovall, chief investment strategist at CFRA. “We’re likely to experience not only higher short-term interest rates as a result of the Fed’s actions, but also higher long-term rates, which should pressure potential (stock) gains.”

Higher rates tend to reduce the price-to-earnings ratio of stocks, a key valuation barometer. Such a scenario can particularly hurt stocks that are seen as the priciest, which includes big technology companies. That explains why tech stocks were the biggest drag on the benchmark S&P 500 today. Apple fell 1.8% and Microsoft shed 3.7%.

Communications companies, retailers and others that rely on direct consumer spending also weighed heavily on the index. Amazon fell 3.2% and Facebook parent Meta fell 3.7%.

The S&P 500 ended down 43.97 points to 4,481.15. The Dow slid 144.67 points to 34,496.51, and the tech-heavy Nasdaq lost 315.35 points to 13,888.82.

Smaller company stocks also fell, sending the Russell 2000 index down 29.11 points, or 1.4%, to 2,016.94.

Investors are keenly focused on Fed policy as the central bank moves to reverse low interest rates and the extraordinary support it began providing for the economy two years ago when the pandemic knocked the economy into a recession.

The Fed’s proposed timetable for allowing billions in bonds and mortgage-backed securities to roll off its balance sheet was hinted at on Tuesday in remarks by Fed Governor Lael Brainard, who said the process could start as soon as May and proceed at a rapid pace.

The rapid reduction in the Fed’s balance sheet would help push up longer-term rates, but also contribute to higher borrowing costs for consumers and businesses.

“The reality is we are in uncharted waters here and the Fed has a difficult task in unwinding the tremendous monetary support over the past couple years,” said Charlie Ripley, senior investment strategist at Allianz Investment Management. “Against this backdrop, it is highly conceivable that uncertainty in the path of monetary policy will remain embedded in markets and that is exactly what we have been witnessing with the recent moves in interest rates and risk assets.”

The yield on the 10-year Treasury rose to 2.61% after the release of the minutes. It had been at 2.59% earlier in the day, up from 2.54% late Tuesday. The yield, which is used to set interest rates on mortgages and many other kinds of loans, is the highest it’s been in three years.

Traders are now pricing in a nearly 77% probability the Fed will raise its key overnight rate by half a percentage point at its next meeting in May. That’s double the usual amount and something the Fed hasn’t done since 2000.

“Even though we’ve known about the coming rate hikes, it’s been pretty difficult for long term equity managers across the board,” said William Huston, chief investment officer at Bay Street Capital Holdings.

Inflation is running at a four-decade high and threatens to crimp economic growth. Higher prices on everything from food to clothing have raised concerns that consumers will eventually pull back on spending. Russia’s invasion of Ukraine has added to those worries, pushing energy and commodity prices, including wheat, even higher.

U.S. benchmark crude oil prices fell 5.6% today, but are more than 30% higher for the year. That has pushed gasoline prices higher, putting more stress on shipping costs, prices for goods and consumers’ wallets.

Treasury Secretary Janet Yellen warned a House panel today that the conflict will have “enormous economic repercussions in Ukraine and beyond.”

The conflict in Ukraine continued prompting financial pressure against Russia. The White House said Western governments will ban new investment in Russia following evidence its soldiers deliberately killed civilians in Ukraine. The U.S. Treasury said President Vladimir Putin’s government will be blocked from paying debts with dollars from American financial institutions, potentially increasing the risk of default.

European governments have resisted appeals to boycott Russian gas, Putin’s biggest export earner, due to the possible impact on their economies.

Today ended up being a mostly quiet day for company news ahead of the latest round of corporate earnings reports. JetBlue Airways fell 8.7% after offering to buy rival budget airline Spirit for $3.6 billion and break up a plan for Spirit to merge with Frontier Airlines. Spirit fell 2.4%.