Major Indexes Plunge 3% After Powell's Tough Talk

Barry Adams
26 Aug, 2022
New York City

Stocks on Wall Street slid after the U.S. Federal Reserve Chairman Powell reiterated the central bank's commitment in bringing down high inflation sooner than later. 

In a short speech lasting eight minutes, Fed chief delivered a forceful reminder of the need to fight inflation now despite the pain it is likely to inflict on the economy. 

Chairman Powell forcefully reiterated the central bank's commitment in aggressively fighting the four-decade high inflation before it entrenched and spread to a wider economy. 

Powell delivered his comments at  the Jackson Hole Economic Symposium, a gathering of central bankers, and said that reducing inflation will take time and will soften the labor market.  

The comments were widely viewed and anticipated but the forceful reiteration only highlighted the long road ahead for the policy makers and the near-term pain for households and businesses. 

"While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. 

These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain," Powell added in his prepared remarks. 

Investors worried that the Fed may take longer to overpower inflation and may have to keep rates above 4% for a while from the current rate range between 2.25% and 2.50%.

"Restoring price stability will likely require maintaining a restrictive policy stance for some time. 

The historical record cautions strongly against prematurely loosening policy," Chairman Powell added. 

Stock markets turned sharply lower after Powell's comments and bond yields jumped above 3%. 

The steady stream of sell orders escalated in the afternoon as traders digested the implications of chairman's remarks and the indexes extended losses by the minute. 

At close, the S&P 500 index dropped 3.4% to 4,057.74 and the Nasdaq Composite index plunged 3.9% to 12,141.27. 

In a broad selloff, only five stocks closed higher in the S&P 500 index. 

For the week, the S&P 500 index declined 4% and the S&P 500 dropped 4.4%. 

Futures of crude oil increased 35 cents to $92.87 a barrel but natural gas fell 6 cents to $9.31 a thermal unit. 

Despite the Fed's tough rhetoric, the central bank has been widely perceived to be be lax in tackling inflation. 

The consumer price index has been rising at faster than the target rate of 2% for twenty months in a row.  

In short, Fed made its task harder by waiting too long. 

In a sharp about-face, Powell labeled inflation as "transitory" and "temporary" while delivering comments at the same conference last year.

But today's comments were designed to send a clear message to the American people of the "pain" ahead and to markets that higher rates are here to stay for a while. 

The yield on 10-year U.S. Treasury notes rose to 3.036% and on 2-year notes jumped to 3.38%. 

On Wall Street, all eleven sectors closed down and investors reacted to corporate news. 

Electronic Arts Inc jumped as much as 6.1% before closing up 3.6% to $132.17 after a report in Swedish media suggested that Amazon.com is likely to make an offer to acquire the game publisher as early as today. 

Farfetch Ltd soared 26.4% to $12.04 after the online luxury fashion retailer reported stronger-than-anticipated quarterly results and smaller loss. 

Ulta Beauty fell 1.8% to $411.48 after the company's latest quarterly results exceeded expectations and also issued a positive outlook for the year. 

Gap Inc, after rising as much as 6%, declined 1.40% to 9.87 after the apparel retailer reported an unexpected quarterly profit on the sales strength at its Banana Republic chain. 

European markets traded sideways but accelerated the decline after Fed chief's dire t a d tough talk. 

The DAX index dropped 2.2% to 12,971.47, the CAC-40 index declined 1.7% to 6,274.26, and the FTSE 100 index fell 0.7% to 7,427.31. 

For the week, the indexes dropped between 1.3% and 3.0%. 

Moreover, weakening in consumer confidence in the euro zone's largest economy also unnerved the market. 

Germany's forward looking consumer confidence index declined further in September to -36.5 from -30.9 in August, according to the survey released by the market research group Gfk on Friday. 

However, French consumer confidence improved unexpectedly in August after falling for seven months in a row, according to survey results released by the French statistical office Insee on Friday. 

Micro Focus International soared 93% to 519.0 pence in London trading after the Canada-based OpenText agreed to acquire the enterprise software maker for $6 billion including debt. 

OpenText declined 12.7% to $32.73. 

Centrica Plc increased 0.6% to 81.90 pence after the U.K. energy regulator Ofgem lifted the cap on household energy, electricity and natural gas bill by 80% to 3,549 pounds a year from the current 1,971 pounds. 

The price cap for pre-payment meters was introduced in 2019 to protect customers from wild swings in energy prices but about 29 suppliers have gone under this year after the surge in energy prices. 

About 24 million households or 85% of the U.K. population are expected to be affected after the implementation of the price revision on October 1.