Stocks fell sharply on Friday as the Federal Reserve signals it is ready to jack up interest rates to fight inflation. 

As the sell-off accelerated in the afternoon, the S&P 500 fell 122 points, or 2.8%, to close at 4,272. The Dow Jones Industrial Average tumbled 981 points, or 2.8%, and the tech-heavy Nasdaq Composite sank 2.5%. Shares were losing ground even before the start of trade after Federal Reserve Chair Jerome Powell indicated that aggressive increases in interest rates were needed to fight inflation.

“The combination of Jerome Powell’s comments and some disappointing earnings news was too much for investors to handle heading into the weekend,” John Lynch, chief investment officer for Comerica Wealth Management,” said in an email. “Moreover, market-based breakeven inflation expectations are climbing, providing a more powerful statement on the potential for persistent pricing pressures than headlines have been suggesting.”

In a panel discussion held Thursday by the International Monetary Fund, Powell said the Fed must move faster than it has previously to tackle high inflation, which suggests sharp interest rate increases are likely in coming months.

Half-point rate hike expected

“I would say that 50 basis points will be on the table for the May meeting,” Powell said

Powell’s comments come as the U.S. faces its fiercest bout of inflation in 40 years. The Consumer Price Index, which tracks a basket of goods and services, jumped 8.5% in March from a year ago.

To help arrest that surge, the Fed has already announced a quarter-percentage point rate hike. Wall Street analysts now expect a half-percentage rate hike at its next meeting in two weeks. Other central banks have also moved to raise interest rates to try and temper the impact of rising prices on businesses and consumers.

In the past, the Fed has typically raised its benchmark short-term rate by more modest quarter-point increments. But policy makers think the economy is on solid ground and and that they can avoid triggering a recession while putting a lid on inflation. Economic data shows conditions in the labor market are tight, while manufacturing continues to rebound amid strong consumer demand. 

“We continue to expect two 50-basis-point rate hikes in May and June,” Rubeela Farooqi, chief U.S. economist at High Frequency Economics, said in a report. “Any subsequent action will depend not only on the path of inflation but also the economy’s response to rapid rate increases over the next few months.”

Bond yields have been gaining ground as investors prepare for higher interest rates. The yield on the 10-year Treasury held steady on Friday at 2.92% after hovering near its highest levels since late 2018.

Eyes on Ukraine

Investors are also watching for developments in Ukraine, anticipating more global supply chain disruptions and market volatility as Russian President Vladimir Putin’s brutal war continues.

“Under the weight of war, global energy and food risk, equity markets may well begin to buckle, unfortunately in a rather spectacular manner. We have been saying for some time that the only way to protect your investment portfolio is to be cautious on equities and buying gold, oil and the U.S. dollar,” said Clifford Bennett, chief economist at ACY Securities.

Despite the uncertainty and rising prices, Powell remains optimistic about the economic outlook.

“The U.S. economy is very strong, performing very well by most forecasts,” he said.

Benchmark U.S. crude fell $1.07 to $102.72 a barrel. It rose 1.6% on Thursday and is up roughly 40% for the year. That has made gasoline more expensive, which cuts deeper into consumers’ wallets. Brent crude, the international standard, lost $1.04 to $106.92 a barrel.