The Dow (INDU) sank 600 points, or 2.1%, and the Nasdaq fell 2.9%.

The broader S&P 500 fell 2.4%. That index is now more than 20% below its all-time high set in January, putting stocks in bear-market territory.

Stocks briefly fell into a bear market on May 20, although a late-day rally rescued the market from closing below that threshold for the first time since the early days of the pandemic in the spring of 2020.
Inflation and recession fears had eased somewhat at the end of May, and stocks regained some ground. But Friday’s miserable Consumer Price Index report showed US inflation was significantly higher than economists had expected last month, which could make the Federal Reserve’s inflation-control efforts more difficult.

After raising rates by a half point in May — an action the Fed hadn’t taken since 2000 — Chair Jerome Powell pledged more of the same until the central bank was satisfied that inflation was under control. At that point, the Fed would resume standard quarter-point hikes, he said.

But after May’s hotter-than-expected inflation report, Wall Street is increasingly calling for tougher action from the Fed to keep prices under control. Jefferies joined Barclays on Monday in predicting that the Federal Reserve would hike rates by three-quarters of a percentage point, an action the Fed hasn’t taken since 1994.

“After holding their breath for nearly a week awaiting the US CPI report for May, investors exhaled in exasperation as inflation came in hotter than expected,” Sam Stovall, chief investment strategist at CFRA, said in a note to clients Monday morning.

Stovall said the risk of larger hikes is dragging the markets lower Monday.

Investors fear two outcomes, neither of them good: Higher rates mean bigger borrowing costs for businesses, which can eat into their bottom lines. And overly zealous action from the Fed could unintentionally plunge the US economy into a recession, especially if businesses start laying off workers and the red-hot housing market crumbles.

There’s no sign that the job and housing markets are in danger of collapse, although both are cooling off somewhat.

In an interview with CNN’s Fareed Zakaria Sunday, former Fed Chair Ben Bernanke said a US recession remains possible. But Bernanke said he had faith that Powell and the Fed could achieve a so-called soft landing, the elusive outcome in which the central bank can cool the economy down to get inflation under control without slowing it down so much that it enters a recession.

“Economists are very bad at predicting recessions, but I think the Fed has a decent chance — a reasonable chance — of achieving what Powell calls a ‘soft-ish landing,’ either no recession or a very mild recession to bring inflation down,” Bernanke said.

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