Wall Street stocks tumbled in early trading on Tuesday amid the growing likelihood that the Federal Reserve could rob the economy of support just after the alarming new variant of the coronavirus began to spread.
Federal Reserve Chairman Jerome H. Powell told a Senate committee on Tuesday that inflation is likely to continue into next year and that the Fed will consider cutting back its bond buying program more quickly in response.
“The economy is very strong right now and inflationary pressures are great,” Mr. Powell said during a Senate Banking Committee hearing. “Therefore, in my opinion, it is appropriate to consider the issue of stopping the purchases of our assets, which we actually announced at our November meeting, perhaps a few months earlier.”
The Fed’s efforts have been a decisive factor in the rapid rise in stocks since the start of the pandemic. The S&P 500, which fell about 0.5% for most of the morning, fell after Mr. Powell’s comments. The index fell 1.5 percent at 11 a.m., more than backtracking on Monday’s results.
The yields on short-term bonds, which were heavily impacted by expectations of a Fed rate hike, rose sharply. The two-year Treasury yield rose to 0.56 percent from about 0.43 percent in a relatively short timeframe as investors interpreted the move away from labeling inflation as “transient” as a signal that the Fed was moving towards higher interest rates.
“The Fed is the ultimate owner of the ‘interim’ characteristic, and the chairman’s decision to go beyond that is clearly a hawkish move,” wrote Jan Lingen, head of US betting strategy at BMO Capital Markets in New York, in a note to clients shortly after Mr. Powell.
Stock prices globally fell ahead of Mr Powell’s testimony as investors struggled to understand the danger posed by the Omicron option. Stoxx Europe 600 fell 0.4 percent. In Asia, the Nikkei 225 in Japan and the Hang Seng in Hong Kong each fell more than 1 percent.
Investors have been keeping a close eye on updates on the Omicron option since last week and remain particularly alert to the effectiveness of vaccines against it.
The CEO of Moderna, the vaccine manufacturer, said in an interview Tuesday that there could be a “significant drop” in the effectiveness of existing vaccines compared to a new version. CEO Stephen Bansel told the Financial Times that it could be months before an Omicron-specific vaccine can be produced on a large scale, but added that it would be risky to move all vaccine production within the company while other options still prevail. …