NEW YORK — U.S. stocks are dropping Wednesday as traders scale back expectations for how much relief the Federal Reserve will deliver next week when it begins cutting interest rates.
The S&P 500 was down 1.5% in midday trading in a wipeout where 95% of the stocks within the index were falling. The Dow Jones Industrial Average was down 650 points, or 1.6%, as of 11 a.m. Eastern time, and the Nasdaq composite was 1.2% lower.
Stocks fell following the government’s latest update on inflation at the consumer level, which came in close to expectations. Overall inflation slowed to 2.5% in August from 2.9% in July, a touch better than expected. But prices rose more from July into August than expected when ignoring food and energy, and economists say that can be a better predictor of where inflation is heading.
All together, the data seemed to confirm that the Fed will indeed cut its main interest rate at its meeting next week, which would be the first such cut in more than four years. But it bolstered expectations that the Fed will begin with only a traditional-sized move of a quarter of a percentage point instead of the more severe half-point that some had been expecting.
“This isn’t the CPI report the market wanted to see,” said Seema Shah, chief global strategist at Principal Asset Management.
Investors have a long history of being overly optimistic about how much and when the Fed will cut interest rates, only to send stock prices lower after being confronted with reality. Wall Street loves lower rates because they can goose the economy by making it cheaper for U.S. companies and households to borrow. Cuts also give boosts to investment prices.
The downside of lower rates is that they can give inflation more fuel.
“We believe the market is pricing in more rate cuts than what will occur this year,” said Gargi Chaudhuri, chief investment and portfolio strategist, Americas at BlackRock.
This time, the Fed at least has already indicated it’s about to begin lowering interest rates as it shifts from fighting high inflation toward protecting the job market and keeping the economy out of a recession. With inflation down from its peak of 9.1% two summers ago, the Fed is hoping to ease the brakes off the already slowing economy.
A worry on Wall Street is that the cuts may prove to be too late, with many U.S. shoppers already struggling under the weight of high prices and stretched ability to spend more.
Vera Bradley’s stock dropped 7.4% after the designer of handbags and the parent company of the Pura Vida brand reported weaker profit and revenue for the latest quarter than analysts expected. It pointed to “stubbornly persistent macro consumer headwinds.”
Elsewhere on Wall Street, Trump Media & Technology Group dropped 15% to worsen its rough run since March. The company behind former President Donald Trump’s Truth Social platform has often risen and fallen with expectations for Trump’s re-election chances, and he’s coming off a debate with Vice President Kamala Harris.
Since closing above $66 in early March, the stock has tumbled to $15.84. That affects Trump particularly because he is the company’s largest shareholder.
Bitcoin and other cryptocurrencies - which Trump has been championing in recent weeks, along with his own crypto company - also fell. Bitcoin was down roughly 3%. Stocks of crypto-related companies also sank, including drops of 3.8% for Coinbase Global and 4.1% for MicroStrategy.
Among the few gainers in the U.S. stock market were solar-energy companies, which are seen as doing better under a Democratic White House than a Republican one. First Solar gained 7.6%.
In the bond market, the yield on the 10-year Treasury fell to 3.62% from 3.64% late Tuesday. The two-year yield, which more closely follows expectations for Fed action, edged down to 3.58% from 3.59%.
In stock markets abroad, indexes fell across much of Europe and Asia.
Japan’s Nikkei 225 dropped 1.5% after a Japanese central bank official was quoted by Japanese media as indicating the Bank of Japan was getting ready to raise interest rates. The comments also pushed the value of the Japanese yen higher against the U.S. dollar, a move that earlier in the summer helped send financial markets around the world reeling.
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AP Business Writers Yuri Kageyama and Matt Ott contributed.
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