An index of global stock markets fell as short-term US Treasury yields rose Friday after Fed Chair Jerome Powell said the US economy will need tight monetary policy “for some time” before inflation is under control.
The dollar managed to wipe out early losses to turn positive against a basket of currencies, while gold, which is losing its appeal as interest rates rise, fell after Mr Powell’s comments.
Tight monetary policy “for some time” means slower growth, a weaker labor market and “some pain” for households and businesses, Powell said in a speech at the central banking conference in Jackson Hole, Wyoming.
“Reducing inflation is likely to require a sustained period of below-trend growth. In addition, labor market conditions are very likely to ease somewhat,” Powell said.
He did not hint at what the Fed might do at its upcoming policy meeting on September 20-21. Officials are expected to approve a 50 or 75 basis point hike in interest rates.
Yield futures linked to expectations about Fed policy fell moments after Powell’s speech on Friday, following a greater chance of a third consecutive 75 basis point rate hike.
“It was aggressive as expected. Powell’s message is clear: the Fed is far from done in its fight against inflation,” said Antoine Bouvet, senior interest rate strategist at ING in London.
MSCI’s stock levels around the world lost 2.47 percent, the worst day in more than two months.
Wall Street’s major indices fell, with Powell’s comments dragging down the growth of megacaps and technology stocks.
“His comments have been hawkish. He’s keeping the pedal to the metal here when it comes to fighting inflationary policies,” said Lindsey Bell, chief money and markets strategist at Ally.
The Dow Jones Industrial Average fell 1,008.38 points, or 3.03 percent, to close at 32,283.4, the S&P 500 lost 141.46 points, or 3.37 percent, to end at 4,057.66, and the Nasdaq Composite fell 497.56 points, or 3.94 percent, to end the session at 12,141.71.
European equities fell as investors also worried about gloomy data on German consumer confidence amid rising energy costs.
Consumer morale in the euro-zone’s two largest economies diverged sharply in August as French consumers benefited from new government measures, while their German counterparts were concerned about rising energy bills, surveys found on Friday.
The pan-European STOXX 600 index lost 1.68 percent.
Two-year US Treasury yields briefly reached their highest level since October 2007, but stabilized near a two-month high following Powell’s comments.
Two-year Treasury yields, which typically move with interest rate expectations, rose based on Powell’s comments and rose 1 basis point to 3.3824 percent.
10-year Treasury yields rose about 1 bp to 3.0334 percent.
The rise in short-term interest rates extended the yield curve inversion, which is widely seen as a signal of an impending recession. The closely watched difference between two- and 10-year government bond yields was -35 basis points, compared to -31.3 basis points before Powell’s speech.
In foreign exchange markets, the dollar cleared early losses against a basket of currencies after Powell’s comments to climb 0.30 percent to 108.8.
The euro, which had risen higher following a Reuters report that some European Central Bank policymakers want to discuss a 75 basis point rate hike at their policy meeting in September, gave up that gain to cut 0.07 percent to $0.9965.
Oil prices ended higher on Friday, boosted by signals from Saudi Arabia that OPEC could cut production, but trading was volatile as investors dismissed the Fed’s warning about future economic pain and eventually shrugged.
Brent crude LCOc1 futures rose $1.65 to settle at $100.99 a barrel. US West Texas Intermediate (WTI) crude CLc1 futures were up 54 cents to reach $93.06 a barrel.
Spot gold stood at $1,736,813 an ounce, down 1.23 percent.