Fed Chairman Powell spooks Wall Street with plans to pull back low interest rates amid latest COVID variant worries
U.S. markets went tumbling Tuesday after the head of the Federal Reserve said it will consider limiting its support for financial markets sooner than expected amid the latest COVID variant omicron.
The S&P 500 fell 1.9%, erasing its gains from a day earlier. The selloff happened after Federal Reserve Board Chairman Jerome Powell told a Senate hearing committee that the central bank may halt the billions of dollars of bond purchases it’s making every month “perhaps a few months sooner.” The economic policy was meant to goose the economy by lowering rates for mortgages and other long-term loans.
An end to the bond purchases, known as “tapering” — the process of slowly pulling back the stimulus provided during the pandemic — would open the door for the Fed to raise short-term interest rates from their record low of nearly zero.
The whammy on interest rates came after stocks were already weak in the morning due to concerns about how badly the fast-spreading omicron variant of coronavirus may hit the global economy.
“There will be heightened volatility around any piece of information,” said Kristina Hooper, chief global market strategist at Invesco. She said markets will likely remain cautious “before we know more.”
Powell said that the Fed should know more about the potential effect of the latest COVID variant in the U.S. and across the globe in the coming days. “Only then can we make an assessment of what the impact would be on the economy,” Powell said. “As I pointed out ... for now, it’s a risk.”
If omicron negatively affects the global economy, it could put the Federal Reserve in a difficult spot. Usually, the central bank would lower interest rates, which encourages borrowers to spend more and investors to pay higher prices for stocks.
But low rates can also encourage inflation, which is already high across the global economy. Powell acknowledged in his testimony before Congress that inflation has been worse and lasted longer than the Fed expected. For months, officials described inflation as only “transitory,” but Powell said that word no longer works.
Powell acknowledged that inflation “imposes significant burdens, especially on those less able to meet the higher costs of essentials like food, housing and transportation.”
The subsequent losses for stocks Tuesday were widespread, with all but seven stocks in the S&P 500 — which fell 88.27 points, or 1.9%, to 4,567 — ending lower. Apple rose 3.2% for the biggest gain in the index.
The Dow Jones industrial average fell 652.22 points, or 1.9%, to 34,483.72.The Nasdaq fell 245.14 points, or 1.6%, to 15,537.69.
With News Wire Services
