Stocks plunged Tuesday afternoon due to an increased likelihood that the Federal Reserve will accelerate the tapering of its large-scale bond purchases at its next meeting in two weeks. The news comes as the rapid spread of the Omicron variant of COVID-19 threatens to further dampen economic confidence in the U.S.
Federal Reserve Chair Jerome Powell told the Senate Banking Committee on Tuesday that he no longer considered inflation “transitory” and that it would likely continue into next year. A tapering of economic supports could ease the problem, he said.
“At this point, the economy is very strong, and inflationary pressures are high,” Powell said during the Senate hearing alongside Treasury Secretary Janet Yellen. “It is therefore appropriate in my view to consider wrapping up the taper of our asset purchases, which we actually announced at our November meeting, perhaps a few months sooner.”
The Fed head, recently nominated by President Joe Biden to lead the central bank for a second four-year term, said early tapering would be discussed at the next meeting of the Federal Open Market Committee in mid-December.
During the pandemic and the Trump era, Powell lowered rates and bought assets to push more money into the sinking economy. Those efforts aided an ailing stock market at the start of the pandemic and were partially responsible for the S&P 500 coming close to doubling from its COVID bottom and marking the fastest bull market rally since World War II.
The tapering news sent markets, which were already lower on Omicron variant fears, tumbling. The Dow dropped 600 points after Powell spoke. The S&P 500 fell by 1.4%. Short-term bond yields, which are very sensitive to Fed movements, spiked as investors anticipated the Fed moving toward higher interest rates at a rapid clip.
Earlier this month, the central bank announced that it would start scaling back its $120 billion in monthly bond purchases over the next eight months. As Fortune’s Shawn Tully outlined recently, letting inflation rise unchecked has now left the Fed with two options going forward, and neither of them are particularly pretty.
Still, some remain skeptical of Powell’s words. Michael Ashton, an investment manager focused on inflation, wrote on Twitter that he wasn’t convinced. “I will believe that this Fed suddenly became hawkish when they actually tighten into a slowing economy,” he wrote. “Not holding my breath. Talk is cheap. And it is the only thing that still is.”
Inflation is currently at a 31-year high. Labor Department data shows that the U.S. consumer price index grew 6.2% in October from the year prior.
