Stocks slumped on Tuesday after a government report showed that inflation last month remained stubbornly high, a setback for investors betting that the Federal Reserve could cut its benchmark interest rate as soon as March.
The Dow Jones Industrial Average fell 736 points, or 1.9%, to 38,062 in afternoon trade, while the S&P 500 and Nasdaq Composite index also fell around 2%.
Financial markets have steadily climbed since October on expectations that the Fed was done pushing up borrowing costs as it seeks to curb inflation, with some Wall Street analysts predicting that the central bank could cut its short-term rate as early as March. But investor sentiment is shifting amid the U.S. economy’s strong economic performance and efforts by Fed officials to tamp down expectations of an imminent cut.
“A market that forcefully expected earlier easing — fortified by a series of rate cuts throughout the year — has had to digest not just a barrage of consistent Fedspeak, but the stark reality that the Fed can still not declare victory on its long campaign to quell inflation,” Quincy Krosby, chief global strategist for LPL Financial, said in an email.
Consumer prices rose 3.1% in January from a year ago, the Labor Department said on Tuesday. Although that is cooler than in December, economists had expected prices to rise at a 2.9% pace from a year ago. Job growth around the U.S. also topped forecasts last month, a sign that economic growth may remain too vigorous to bring inflation down closer to the Fed’s 2% target rate.
Although some economists have raised concerns that inflation could re-accelerate, most analysts continue to expect a gradual slowdown in price increases.
“Until proven otherwise, the longer-term cooling inflation trend is still in place,” said Chris Larkin, managing director, trading and investing, at E-Trade from Morgan Stanley. “The Fed had already made clear that rate cuts weren’t going to happen as soon as many people wanted them to. Today was simply a reminder of why they were inclined to wait.”
—The Associated Press contributed to this report.