The stock market extended an end-of-week selloff on Friday after the Labor Department reported inflation unexpectedly returned to record highs last month—feeding concerns that the Federal Reserve may embark on a more aggressive campaign to temper rising prices, even if it risks stunting economic growth.
Though at one point positive in pre-market trading, the Dow Jones Industrial Average plunged 750 points, or 2.3%, to 31,537 by 10 a.m. ET on Friday, while the S&P 500 fell 2.6% and the tech-heavy Nasdaq 3%.
Prompting a sudden plunge, the Labor Department reported early Friday that consumer prices rose at 8.6% in May—surpassing a record high 8.5% from March despite economist projections calling for a softer 8.3% increase.
In emailed comments, Peter Earle of the nonpartisan American Institute for Economic Research called the report “very troubling” and evidence that the Fed’s efforts to combat spiking prices by raising interest rates have done “little to nothing.”
The Fed is “now between a rock and a very hard place,” says Earle, noting that acting more aggressively in raising interest rates, which tend to hurt corporate earnings, heightens the risk of a recession.
In a note to clients Friday, Bank of America economist Aditya Bhave said yield curves flattened after the report—a sign the Fed may need to “hike aggressively to cool inflation” at the expense of longer-term economic growth.
Bhave said there’s now “some probability” of a 75 basis-point hike in July—higher than the half-point hike officials said they were considering late last month.
Though the economy quickly bounced back after the Covid recession in 2020, the Fed’s withdrawal of pandemic stimulus measures, Russia’s invasion of Ukraine and lingering Covid restrictions have heightened market uncertainty this year. Last quarter, the stock market posted its worst showing since the market crash in early 2020. The U.S. economy also unexpectedly shrank at an annual rate of 1.5% in the quarter. After climbing nearly 27% last year, the S&P is down 18.5% this year, and the tech-heavy Nasdaq has plummeted 28%. “Recession risks are high—uncomfortably high—and rising,” Mark Zandi, chief economist at Moody’s Analytics, said in a recent note. “For the economy to navigate through without suffering a downturn, we need some very deft policymaking from the Fed and a bit of luck.”
What To Watch For
The Fed’s next two-day policy meeting concludes on Wednesday, when officials are expected to raise interest rates by another 50 basis points as part of the central bank’s most aggressive tightening campaign in two decades.