The S&P 500 was 3% lower in afternoon trade, threatening to snap a four-day losing streak. Bond prices also fell sharply, sending their yields higher, after a report showed inflation slowed to just 8.3 percent in August, instead of the 8.1 percent economists had expected. The warmer-than-expected reading means traders are bracing for the Federal Reserve to eventually raise interest rates even higher than expected to fight inflation, with all the risks to the economy that entails. Fears of higher interest rates sent prices down for everything from gold to cryptocurrencies to crude oil. “Right now, it’s not so much about the journey as it is about the destination,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments. “If the Fed wants to hike and hold, the big question is at what level.” The Dow Jones Industrial Average was down 882 points, or 2.7%, at 31,499 as of 12:45 p.m. Eastern time, and the Nasdaq composite was down 3.8%. Major tech stocks fell more than the rest of the market, with all 11 sectors that make up the S&P 500 sinking. Most of Wall Street began to believe the Fed would raise its key short-term interest rate by three-quarters of a percentage point at its meeting next week. However, the hope was that inflation was in the midst of a rapid decline to more normal levels after peaking in June at 9.1%. The thinking was that such a slowdown would allow the Fed to reduce the size of its rate hikes through the end of this year and then potentially hold steady until early 2023. Tuesday’s report dashed some of those hopes. Many of the data points in it were worse than economists expected, including some that the Fed pays close attention to, such as inflation outside of food and energy prices. Markets rose 0.6 percent at such prices in August from July, twice what economists had expected, said Gargi Chaudhuri, chief investment strategist at iShares. The inflation data was so much worse than expected that traders now see a one-in-five chance of a full percentage point rate hike by the Fed next week. That would be four times the usual move, and no one in the futures market predicted such an increase a day earlier. Traders now see a better than 60% chance the Fed will raise its federal funds rate all the way to a range of 4.25% to 4.50% by March. A day earlier, they saw less than a 17% chance of that high, according to CME Group. The Fed has already raised its key interest rate four times this year, with the last two hikes by three-quarters of a percentage point. The federal funds rate currently ranges from 2.25% to 2.50%. “The Fed cannot let inflation continue. You have to do whatever is necessary to stop prices going up,” said Russell Evans, chief executive of Avitas Wealth Management. “This shows that the Fed still has a lot of work to do to reduce inflation.” Higher interest rates hurt the economy by making it more expensive to buy a home, car or anything else bought with credit. Mortgage rates have already reached their highest level since 2008, causing pain in the housing industry. The hope is that the Fed will be able to pull the tightrope of slowing the economy enough to quell high inflation, but not enough to create a painful recession. Tuesday’s data put hopes for such a “soft landing” under greater threat. Meanwhile, higher interest rates are also putting pressure on prices for stocks, bonds and other investments. Investments that are considered the most expensive or riskiest are those that are most affected by higher interest rates. Bitcoin fell 6.7%. In the stock market, all but seven S&P 500 stocks fell. Technology and other high-growth companies fell more than the rest of the market because they are seen as more at risk than higher rates. To be sure, the losses only return the S&P 500 close to where it was before its recent winning streak. That run was based on hopes that Tuesday’s inflation report would show a more comforting slowdown. The subsequent wipeout fits what has become a pattern on Wall Street this year: stocks fall on inflation worries, rise on hopes the Fed might ease interest rates, then fall again when data undermines those hopes. Tuesday’s inflation report arrived before the start of trading on Wall Street, but sent a jitter through markets around the world. Bond yields jumped soon after expectations for a more hawkish Fed. The yield on the two-year note, which tends to track expectations for Fed action, jumped to 3.75 percent from 3.57 percent late Monday. The 10-year yield, which helps dictate the direction of mortgage and other lending rates, rose to 3.43 percent from 3.36 percent. Stock markets in Europe, meanwhile, turned from gains to losses. Germany’s DAX lost 1.6%, and France’s CAC 40 fell 1.4%. Expectations of a more hawkish Fed also helped the greenback add to its already strong gains this year. The dollar has risen against the euro, Japanese yen and other currencies in large part because the Fed has been raising interest rates faster and by wider margins than many other central banks. An index that measures the dollar’s value against several major currencies rose 1.2 percent. ——— AP Business writer Damian J. Troise contributed.
