Stocks and bonds slumped on Wednesday, as fresh inflation data highlighted Wall Street’s sensitivity to rising price across the economy accelerating again.
The S&P 500 fell as much as 1.1 percent in early morning trading, before moderating after testimony from Jerome H. Powell, the Federal Reserve chair, before Congress when he acknowledged that there was more to do to slow inflation further, even if the central bank was getting close to its target of 2 percent.
The Nasdaq Composite index, which is chock-full of tech stocks that have come under pressure recently from rising global competition to develop the chips that will power the development of artificial intelligence, also initially fell before rallying to trade flat in the afternoon.
Data from the Bureau of Labor Statistics on Wednesday showed that prices rose 3 percent for the year through January, more than analysts had expected. That is up from 2.9 percent in December. The “core” Consumer Price Index, which excludes volatile food and energy prices, rose 3.3 percent year-over-year.
Signs of continuing price pressure is likely to encourage the Fed to refrain from further interest rate cuts in the coming months. For stock investors, higher interest rates means slower business activity, which can weigh on companies’ earnings and stock prices.
The 10-year Treasury yield, a benchmark interest rate from which a host of consumer and corporate borrowing rates are calculated, rose 0.1 percentage points on Wednesday, on course for its largest move higher in a single day since December.
The uptick in inflation in January “does not derail the longer-term downward trend in inflation,” said Kyle Chapman, a foreign exchange market analyst at Ballinger Group. But, he said, “it does reaffirm the consensus that cuts are going to come much more slowly than we had thought towards the end of last year.”
Investors are now betting that the Fed will keep interest rates at their current level until December. It’s a drastic shift in expectations since last year, when traders were expecting as many as four cuts for 2025, and even just a few weeks ago investors expected the next cut in rates as soon as June.
The two-year Treasury yield, which is sensitive to changes in investors’ interest rate expectations, rose sharply after the inflation report, up 0.1 percentage points to 4.36 percent, close to its highest level of the year. Yields move inversely to a bond’s price.
Wednesday’s market drop comes after a bumpy three weeks for traders, with whipsaw swings in stock prices reflecting investors’ struggle to parse the flurry of executive actions taken by President Trump since he returned to the White House for a second term.
The S&P 500 has risen roughly 3 percent since the start of the year and has nudged up 1 percent since inauguration day, despite the volatility.
Impending tariffs are adding to concern about an acceleration in inflation. On Monday, Mr. Trump announced tariffs on foreign steel and aluminum. He has already imposed a 10 percent tariff on Chinese goods, and broad 25 percent tariffs on Canada and Mexico are set to take effect in March, after being delayed for a month.
“Rising prices already appear to be a headwind, and the prospect of new trade barriers have the potential to further fuel inflationary pressures by increasing costs for businesses and consumers,” said Jason Pride, chief of investment strategy and research at Glenmede, a wealth management firm.
