Wall Street failed to rebound Tuesday, and investors and corporate America braced for an economic slowdown as the Federal Reserve prepared to raise interest rates by up to three-quarters of a percentage point on Wednesday in a bid to wrangle inflation.
The Dow Jones Industrial Average flitted up and down in early trading before closing down 151 points, or 0.5%, while the S&P 500 fell deeper into bear market territory, slipping 0.38% on the day.
The Labor Department reported Tuesday that the Producer Price Index, which gauges inflation before it hits consumers, surged 10.8% in May from a year earlier.
Concerns about soaring costs are heaping pressure on the central bank to take aggressive action — while prompting fears that the moves will usher in a recession instead of giving the economy a soft landing.
Goldman Sachs analysts said they anticipate 75-basis-point rate hikes from the central bank in June and July, followed by a 50-basis-point hike in September and 25-basis-point increases in November and December.
The Goldman team cited a Wall Street Journal article that said the central bank was changing its thinking and considering a more aggressive move to dampen demand and corral inflation. Analysts previously anticipated a half-point increase — 50 basis points — at Wednesday’s session.
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Federal Reserve Chair Jerome H. Powell recently said the bank will keep raising rates until it sees “clear and convincing evidence that inflation is coming down.”
Inflation hit a new 40-year high in May, according to a hotter-than-anticipated Labor Department report on Friday. For months, Americans have reported higher costs for food, gas and everyday goods.
Fuel prices have reached an average of $5 per gallon nationwide, stemming partly from Russian President Vladimir Putin’s invasion of Ukraine.
Steve Hanke, a professor of applied economics at the Johns Hopkins University in Baltimore, said inflation did not come down after World War II or the Korean War until the Fed raised interest rates above the inflation rate and the story was the same during the Great Stagflation of the 1970s.
“We are now faced with another great inflation in which, thanks to the Fed’s mistakes, it’s never been further behind the curve,” he said.
Mr. Hanke put the likelihood of a 75-basis points hike at 70%.
“With a 75bp correction, it is very difficult to contemplate exactly how the market would take it,” he said.
Inflation has been a major drag on President Biden’s term and is a frequent talking point for Republicans eyeing political gains in November.
Mr. Biden, speaking to a friendly crowd at the AFL-CIO union convention in Philadelphia, said the U.S. is poised for success “once global inflation begins to recede.”
“The truth is, I’ve never been more optimistic about American than I am today,” he said.
At the same time, he acknowledged that prices are too high and he is unleashing oil from the U.S. strategic reserve while cajoling other nations to produce more.
“I’m doing everything in my power to blunt Putin’s gas price hike,” Mr. Biden said.
The president said his social spending agenda, which is stalled in Congress, would cut costs for prescription drugs and alleviate economic pressure on families.
GOP lawmakers on Tuesday said that, given sticker shock at the pump and cash register, Mr. Biden must stop plans for higher government spending or tax increases.
“Sustained high inflation is out of control. Wholesale prices have been rising at double-digit rates for six consecutive months, hammering manufacturers, small businesses and consumers,” said Sen. Mike Crapo, Idaho Republican and ranking member of the Senate Finance Committee. “As Americans continue to face sticker shock at the gas station and grocery stores, tax hikes, which are eventually passed on to consumers, are not the answer.”
Sen. Ben Sasse, Nebraska Republican, urged the president to be straightforward about the impact of government relief.
“President Biden can yell at clouds all he wants, but the record-breaking spending he keeps bragging about is driving inflation,” Mr. Sasse said. “Families feel the pain and know the facts — we aren’t stupid, Mr. President.”
• Tom Howell Jr. can be reached at thowell@washingtontimes.com.
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