Stocks tumbled in the US and Europe as investors grew increasingly concerned that the Federal Reserve and other central banks are willing to risk a recession to bring inflation under control.
The S&P 500 fell 2.5 per cent Thursday, erasing its gains from early in the week. The tech-heavy Nasdaq composite lost 3.2 per cent and the Dow gave back 2.2 per cent. A day earlier, the Fed said interest rates will need to go higher than previously expected in order to tame inflation.
Wall Street’s weekly gains have been wiped out.Credit:Bloomberg
The Australian sharemarket is set to open lower, with futures at 7.59am AEDT pointing to a fall of 83 points, or 1.2 per cent, at the open. The ASX lost 0.6 per cent on Thursday. The Australian dollar also slumped as the greenback strengthened, to be 2.5 per cent lower at 66.95 US cents at 8.44am AEDT.
The Fed raised its short-term interest rate by half a percentage point on Wednesday, its seventh increase this year. Central banks in Europe followed along Thursday, with the European Central Bank, Bank of England and Swiss National Bank each raising their main lending rate by a half-point Thursday. European stocks fell sharply, with Germany’s DAX dropping 3.3 per cent.
Although the Fed is slowing the pace of its rate increases, the central bank signalled it expects rates to be higher over the coming few years than it had previously anticipated. That disappointed investors who hoped recent signs that inflation is easing somewhat would persuade the Fed to take some pressure off the brakes it’s applying to the US economy.
The federal funds rate stands at a range of 4.25 per cent to 4.5 per cent, the highest level in 15 years. Fed policymakers forecast that the central bank’s rate will reach a range of 5 per cent to 5.25 per cent by the end of 2023.
The yield on the two-year Treasury, which closely tracks expectations for Fed moves, rose to 4.24 per cent from 4.21 per cent.
The central bank has been fighting to lower inflation at the same time that pockets of the economy, including employment and consumer spending, remain strong. That has made it more difficult to rein in high prices on everything from food to clothing.
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