U.S. stocks fall for third day as Powell reaffirms the Fed is not done raising interest rates

What drove markets

U.S. stocks finished lower on Wednesday in volatile trading with the main indexes logging three consecutive sessions of decline, dialing back from recent levels not seen in more than a year.

Markets assessed remarks from Fed Chair Powell, who testified before congressional lawmakers this week, starting Wednesday with the House Financial Services Committee in a semi-annual report on monetary policy and economic outlook.

See: Powell tells Congress to expect higher interest rates

Powell Wednesday reiterated that he and his colleagues expect more interest-rate hikes ahead as inflation is still too high. However, he did not shed any new light on the timing of the moves.

“Nearly all FOMC participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year,” Powell said. 

Powell said in the question-and-answer session that the forecast of two more interest-rate hikes this year is a “pretty good guess” as there is strong support among his colleagues for two additional 25-basis-point rate hikes this year.

“A big majority believes [they will] raise rates twice this year. You know, I think that’s a pretty good guess of what will happen, if the economy performs as expected,” Powell said during testimony to the House Financial Services committee Wednesday afternoon.

The central bank kept interest rates unchanged last week, but many market participants think at least one more rate hike could be coming starting from the FOMC’s July meeting.

David Russell, vice president of market intelligence at TradeStation, said Powell is “straddling the fence between hawk and dove” by emphasizing elevated inflation but also expectations that prices will ease. As a result, it will keep his options open for the next FOMC meeting in late July as policymakers will have the chance to assess another whole month of economic data by then.

However, unless the employment picture slows sharply between now and then, investors will probably keep expecting one more 25-basis-point hike to satisfy the hawks on the board, Russell said. “Policymakers don’t want to get caught napping again in their fight against inflation.”

See: Economist who anticipated bank failures says U.S. recession may be just around the corner

Austan Goolsbee, the president of the Chicago Federal Reserve said the central bank needs to “do more sniffing” on the economy and inflation before determining whether to resume raising interest rates. “I have not decided what should be the rate decision more than a month from now,” Goolsbee said.

Meanwhile, former Fed governor Lawrence Lindsey said that the Fed will keep raising interest rates until they reach the 6% level sometime in 2024. Lindsey, who was a Fed governor in the 1990s, and then was a top advisor to President George W. Bush, said he expects two rate hikes and then more in 2024. Lindsey thinks the Fed needs to keep hiking until the market feels pain. “Until the markets say ‘ouch,’ the Fed has not likely done it’s job,” he said.

Companies in focus

• Amazon.com Inc. 
  AMZN,
  -0.76%
   finished 0.8% lower on Wednesday after the Federal Trade Commission said it has taken action against the ecommerce giant, alleging the company manipulated consumers into enrolling in Amazon Prime without their consent. 

• FedEx Corp.
  FDX,
  -2.51%
  dropped 2.5% after the logistics company’s full-year profit forecast fell short of expectations.

• Tesla Inc.
  TSLA,
  -5.46%
  stock lost 5.5% after the EV maker’s chief executive Elon Musk met with India’s Prime Minister Narenda Modi on Tuesday, and said his company will be in India “as soon as humanly possible.”

• Nio Inc.
  NIO,
  -2.99%
  fell nearly 3% after a near 4% gain in Hong Kong as the Chinese electric-vehicle maker unveiled plans for an investment of more than $1 billion from an Abu Dhabi government-backed fund.

— Barbara Kollmeyer contributed.