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.
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.
“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.
“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.