Markets were frightened by a warning from Jerome Powell, the Fed’s chairman, who acknowledged that inflation was “very high” and said further interest rate hikes of 0.5 percentage points were likely to be needed within weeks.
US consumer prices jumped 8.5 percent in March from the same month last year, their biggest rise since the 1980s.
As rising living costs threaten business investment and consumer spending, there is growing concern that rising interest rates may not be enough to prevent an inflationary spiral.
Politicians are following a thin line as they try to curb inflation as the war in Ukraine and the latest round of blocking Covid in China begin to weigh on global growth.
The Fed raised interest rates from 0.5% to 1% this week, its biggest increase since 2000.
Shares initially rose after the announcement on Wednesday, with the S&P 500 closing 3 percent higher in its biggest one-day jump since May 2020, after Mr Powell ruled out a 0.75 percentage point increase in interest rates.
Thomas Matthews of Capital Economics said: “Investors have begun to turn down some chances for an even bigger increase. Maybe it makes sense that initially there was something of a relief in both the bond and stock markets.
“With the greater monetary tightening coming from the Fed, we believe that the rise in government bond yields must continue and that stocks will continue to struggle.
Anthony Saglimbene of Ameriprise Financial said: “This is a very confusing environment for investors at the moment. There are generally negative sentiment in the market.”
Daniel Ives of Wedbush said: “Risk aversion is brutal for investors in this technological wreck. White Street is on sale on Wall Street as Powell and the Fed try to chase rising inflation.
“It was a horror show for Nasdaq and technology stocks were crushed by the Fed’s fears. We see this as a capitulation of technology investors and an exaggeration here. “
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