Stocks fell Friday to extend a streak of volatile trading following the Federal Reserve's latest monetary policy decision and projections.
The Dow sold off sharply, sinking by 1.6%, or more than 500 points, to close out a fifth straight session of declines. The index fell more than 3% on the week in its worst weekly performance since October. The S&P 500 extended losses to close lower by 1.3%, while the Nasdaq fell 0.9%.
Treasury yields pared some recent gains, and the benchmark 10-year yield dipped. Traders piled back into government bonds Thursday and Friday morning after selling immediately following the Federal Reserve's monetary policy decision and updated projections on Wednesday, which suggested two interest rate hikes could take place by year-end 2023.
The Fed's projections this week suggested a more hawkish tilt to monetary policy than many market participants had anticipated for the coming years, with the Fed signaling it would eventually ease up some of its highly accommodative monetary policy support even with the economy not yet fully recovered from the pandemic at present. Comments from St. Louis Federal Reserve President James Bullard, who had previously tended to fall on the more dovish side of the Fed policy spectrum, also added to markets' perceptions of a more aggressive central bank. Bullard said he saw a potential for an interest rate increase as soon as next year.
“I think it’s natural that we’ve tilted a little bit more hawkish here to contain inflationary pressures,” Bullard said in a CNBC interview, noting recent improvements in the economy.
Thursday's weekly jobless claims report from the Labor Department showed an unexpected increase in initial unemployment filings, underscoring the still-choppy recovery taking place across the U.S.
"The labor market remains constrained by supply shortages that are outstripping demand and preventing a stronger recovery," Rubeela Farooqi, chief U.S. economist for High Frequency Economics, said in a note Thursday. "However, we expect further strengthening ahead as the economy continues to rebalance."
"That was also the message from Fed Chair Powell in his press briefing on Wednesday," Farooqi added. "He expects a strengthening labor market and continued job creation as constraints on supply ease over the summer months and into the fall."
Still, a string of hotter-than-expected prints on inflation, as well as myriad anecdotes about supply chain disruptions and rising prices for producers and consumers, have also made the case for some tightening of policy, many pundits noted. Stocks could see some choppiness in the near-term as investors continue to appraise monetary policymakers' next moves.
"With the way inflation has been coming in of late, it makes perfect sense that some people giving their dot plots would expect some increases in rates earlier than before," Tim Johnson, BNP Paribas Asset Management head of global multi-sector fixed Income, told Yahoo Finance. "So I'm not surprised, and I think the market has been really complacent and comfortable with the backstop of the Fed for a long time. We're in a transition phase now and there's going to be a little bit of turbulence."
Others offered a similar take.
“The market thought the Fed was going to be behind the curve when it comes to keeping inflation in check,” Shawn Cruz, TD Ameritrade’s Trader Services senior manager, told Yahoo Finance. “By the Fed at least now acknowledging that there are going to be some inflationary pressures, they are going to have to tighten policy, I the market now has a little bit more faith in the Fed to keep inflation under control."
4:08 p.m. ET: Stocks end sharply lower, S&P 500 and Dow each drop more than 1%
Here's where the three major stock indexes finished out Friday's session:
S&P 500 (^GSPC): -55.41 (-1.31%) to 4,166.45
Dow (^DJI): -533.37 (-1.58%) to 33,290.08
Nasdaq (^IXIC): -130.97 (-0.92%) to 14,030.38
10:23 a.m. ET: 'The Fed quite reasonably ... has had to adapt and adjust to that higher growth forecast': Strategist
The Federal Reserve's latest monetary policy decision and projections contributed to a selloff in risk assets and U.S. equities especially, as market participants priced in the updated likelihood of a sooner-than-expected hike to interest rates. However, as the dust settles around this decision and more economic data comes in, investors may begin to see the Fed's guidance as more justified to stave off an unchecked surge in inflation alongside the pickup in overall economic growth. But in the event that economic activity takes a turn lower, the central bank also has the flexibility to wait on changing monetary policy over the next few years.
"I think what the Fed is really responding to is that environment of a slightly faster rebound in economic activity, faster data on inflation, maybe a slightly longer 'transitory' phase of elevated inflation than many economists expected," Joseph Little, HSBC Global Asset Management global chief strategist, told Yahoo Finance. "And so the Fed quite reasonably, quite rightly, has to adapt and adjust to that higher growth forecast, higher inflation forecast in Q4. And really what's got the markets in a little bit of a tizzy is this projection for a bringing forward of interest rate rises in 2023."
"As we digest that, I think it's important to set those forecasts alongside Mr. Powell's comments of taking some of the projections with a grain of salt," he added. "There is a significant amount of uncertainty about the outlook."
9:50 a.m. ET: 'In general, inflation is good for shares provided that inflation expectations don't become unhinged': Jefferies
The Federal Reserve's revised outlook on Wednesday showed at least some central bank officials expected stronger inflationary pressures to emerge in the U.S. economy over the next two years, compared to their March projections. The median projection for core personal consumptions expenditures inflation (PCE) was revised up to 3.0% for 2021 and 2.1% for 2022, compared to 2.2% and 2.0%, respectively, from the central bank's March projections.
But investors need not necessarily become overly alarmed at prospects of higher inflation, argued Jefferies Global Equity Strategist Sean Darby. Rising prices and rates typically characterize economic recoveries, and inflation can also in many cases incentivize traders to keep investing in equities in hopes of generating a return that outpaces the rate of inflation.
"While the rate of change in U.S. economic forecasts has stalled recently, earnings revisions have held up reflecting possibly the S&P 500 overseas exposure but also the heightened sensitivity that equities have to higher prices," Darby wrote in a note. "In general, inflation is good for shares provided that inflation expectations don't become unhinged."
"With Jefferies U.E. economics team forecasting 7% real GDP in 2021 and inflation ~3%, nominal GDP can easily be north of 10% — profits are not a problem for the S&P 500 in2021 and 2022," he added.
9:31 a.m. ET: Dow extends losses, shedding more than 400 points, or 1%
The three major indexes extended losses Friday morning, with the Dow heading for its worst week since January as risk assets sold off.
The S&P 500 was down by 0.8% just after market open, while the Dow underperformed with a plunge of over 1%. The Nasdaq fared only slightly better, shedding 0.7% to give back some of Thursday's gains.
Small cap stocks also dipped, and the Russell 2000 index shed 1.2%. U.S. crude oil prices were down 0.25%, or about 18 cents per barrel, but held just under $71 per barrel. Gold prices steadied after sinking earlier this week.
7:25 a.m. ET Friday: Dow heads for fifth straight decline
Here's where markets were trading ahead of the opening bell Friday morning:
S&P 500 futures (ES=F): 4,211.5, -10.75 points (-0.25%)
Dow futures (YM=F): 33,697.00, -108 points (-0.32%)
Nasdaq futures (NQ=F): 14,168.75, +3.25 points (+0.02%)
Crude (CL=F): -$0.38 (-0.53%) to $70.66 a barrel
Gold (GC=F): +$18.20 (+1.03%) to $1,793.00 per ounce
10-year Treasury (^TNX): -2.1 bps to yield 1.49%
6:16 p.m. ET Thursday: Stock futures fall, extending earlier declines
Here's where markets were trading Wednesday evening:
S&P 500 futures (ES=F): 4,226.00, +3.75 points (+0.09%)
Dow futures (YM=F): 33,806.00, +1 point (roughly unchanged)
Nasdaq futures (NQ=F): 14,196.25, +20.75 points (+0.15%)
Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck
Read more from Emily: