Stocks fall toward weakest levels in nearly 2 years on hot inflation data

The S&P 500 was 1.4% lower in morning trading after a government report showed inflation is spreading more widely across the economy, with one closely followed component accelerating to its hottest level in 40 years. That’s forcing investors to brace for continued, big hikes to interest rates by the Federal Reserve to get inflation under control, and the potential recession those moves could create.

The Dow Jones Industrial Average fell 287 points, or 1%, to 28,923, as of 9:57 a.m. Eastern time, and the Nasdaq composite was 2.2% lower. All three indexes were down even more at the start of trading, with the S&P 500 tumbling 2.4% and the Dow down 549 points.

They’re the latest drops for Wall Street, where stocks have already lost a quarter of their value this year on worries about the worst inflation in four decades and the harsh remedy the Federal Reserve is doling out to treat it. The S&P 500 touched its lowest point since early November 2020.

Most investors came into the morning already expecting the Fed to hike its key overnight interest rate by three-quarters of a percentage point next month, which would be its fourth straight hike that was triple the usual size.

But Thursday’s disappointing data means many investors now expect a fifth such increase in December, dashing expectations that the Fed may begin downshifting soon. Bets are increasing that the Fed could pull its overnight rate above 5% by early next year. It started this year at virtually zero.

Higher rates make buying a house, car or anything else purchased on credit more expensive, and the hope is that will slow the economy and job market enough to undercut inflation. But they take a notoriously long time to take full effect, and the Fed risks causing a recession if it ends up going too far.

“If the Fed insists on continuing to hike until the numbers improve, they are going to over-hike,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments. “They’re swinging from doing too little to doing too much. Those two vices don’t cancel out.”

The growing expectations for an even more aggressive Fed sent Treasury yields jumping. The yield on the 10-year Treasury, which helps set rates for mortgages and many other loans, soared to 4.01% from 3.90% late Wednesday and is near its highest level in more than a decade.

The two-year yield, which moves more on expectations for Fed action, surged to 4.49% to from 4.29%.

Higher yields amp up the pressure on the economy not only by making loans more expensive and slowing growth. They also drag down prices for stocks, cryptocurrencies and nearly every other investment because they mean bonds are paying more in interest, which pulls some dollars away from other investments.

Investments seen as the riskiest, the most expensive or forcing investors to wait the longest for big growth have been the ones hit hardest by this year’s rise in rates. On Thursday, bitcoin lost 3.5%, and technology companies led the drops for stocks on Wall Street.

Gold fell 1.5%, as investors found they could get paid more for owning bonds instead of the metal, which pays nothing.

The inflation report thudded onto Wall Street just as companies gear up to report how much profit they earned during the summer.

If they could report big growth, that would give some major support to stock prices even as the worries about higher-for-longer rates roil markets. But analysts have been highlighting the pressures created by high inflation, high interest rates and the soaring value of the U.S. dollar against other currencies, which dilutes the dollar value of sales made abroad.

“Earnings season might not be bad,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management, “but being strong enough to reverse this tide will be a tough go.”

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AP Business Writers Joe McDonald and Matt Ott contributed.