US Stocks Tumble as Investors Bet on Rate Hike Amid Inflation Fears
The US stock market saw a slight dip on Friday as investors grew more confident that the Federal Reserve will hike interest rates to combat inflation. The S&P 500 fell by 0.2%, while the Dow Jones Industrial Average dipped by less than 0.1% and the Nasdaq composite dropped by 0.5%. This reaction was stronger in the bond market, where yields rose significantly after Fed Chairman Kevin Warsh's speech at an annual economic symposium in Wyoming.
Warsh emphasized that short-term interest rates are a key tool for the Fed to control inflation and maintain a strong job market. He stated that he would be hard pressed to describe broad financial conditions as restrictive, implying that rates may not be high enough to curb the economy and inflation. This led to traders increasing their bets on a rate hike, with the probability of an interest rate increase next month rising to nearly 58% from 35% the day before.
The yield on the two-year Treasury jumped to 4.35%, while longer-term yields also rose, but not as significantly. The 10-year Treasury yield climbed to 4.72% and the 30-year Treasury yield got to 5.21%. Economists at Bank of America attributed this move to investors pricing in a more credible Fed.