Dow falls as Fed gives plan to shrink balance sheet, considers bigger rate hikes

Stocks fell for a second day on Wednesday and rates soared to new heights as the Federal Reserve gave more guidance on how fast it will tighten monetary policy to fight inflation, raising concerns it may slow the economy.

The Dow Jones Industrial Average traded 335 points lower, or about 1%. The S&P 500 slid 1.5%, and the Nasdaq Composite pulled back by 2.7% after shedding about 2.3% on Tuesday.

The Fed’s release of its meeting minutes indicated on Wednesday afternoon that officials “generally agreed” it should shrink its balance sheet by $95 billion per month. The minutes also showed the central bank was considering larger rate hikes than its usual 25-basis-point, or quarter-point, increments.

“Many participants noted that — with inflation well above the Committee’s objective, inflationary risks to the upside, and the federal funds rate well below participants’ estimates of its longer-run level — they would have preferred a 50 basis point increase in the target range for the federal funds rate at this meeting,” the minutes said.

The 10-year Treasury yield jumped above 2.65% to a three-year high on Wednesday and remained near that high following the release of the Fed meeting minutes. The rate ended Monday at 2.40%. The minutes were from the Fed’s March meeting where it raised rates by a quarter point and indicated six more hikes of that magnitude were coming this year.

Stocks were lower before the Fed minutes release and dipped to session lows in the aftermath. Officials in recent days have tried to warn investors even faster policy tightening could be ahead.

Earlier Wednesday, Philadelphia Federal Reserve President Patrick Harker said that he is “acutely concerned” about rising inflation, noting that he expects “a series of deliberate, methodical hikes as the year continues and the data evolve.”

His comments come less than a day after Fed Governor Lael Brainard indicated support for higher interest rates and said a “rapid” reduction of the central bank’s balance sheet could come as soon as May. Brainard’s remarks pushed stocks lower in the previous session.

“It is of paramount importance to get inflation down,” Brainard said during a Minneapolis Fed webinar. Brainard has been nominated to be vice chair of the Federal Open Market Committee. San Francisco Fed President Mary Daly echoed similar sentiments toward inflation on Tuesday.

The move from the Fed along and recent remarks signal to investors that the central bank is prepared to act swifter than expected to cut back inflation and shrink its balance sheet.

“What that means for the markets are continued volatility around the uncertainty to higher rates and lower-income cash flow stocks, growth type stocks probably continuing to get discounted as rates rise,” Cliff Corso of Advisors Asset Management told CNBC’s “Worldwide Exchange.”

Tech shares fell again on Wednesday following Tuesday’s losses, as investors rotated out of the group and braced for higher rates to slow the economy. Apple, Microsoft, Amazon and Tesla contributed to the sector’s decline and the Nasdaq’s fall. Chipmakers Nvidia and Marvell Technology also continued their descent, falling 7% and 3.3%, respectively.

As the Fed hikes rates, investors have begun searching for stocks with stable profits and shying away from those offering future growth. That includes the utilities, health care and consumer staples sectors — which continued to climb Wednesday, with Amgen and Johnson & Johnson rising about 2%. Consumer staples such as Walmart, Coca-Cola and Procter & Gamble also inched slightly higher.

“Today and yesterday you’re really starting to see the equity market catch up with the bond market,” said Chris Zaccarelli, CIO at Independent Advisor Alliance. “And by that, I mean equities are starting price in a more aggressive Fed. You’re starting to see a bid for safety, you’re seeing that classic risk-off move.”

Traders were also bracing for the start of the corporate earnings season.

Goldman Sachs chief U.S. equity strategist David Kostin said Wednesday on CNBC’s “Squawk on the Street” that stocks with “resilient margins” are better prepared to weather the current environment. That includes names such as Alphabet and Nike — which have maintained “high and stable margins” even amid the pandemic, he said.

“Overall, the U.S. equities market maybe has 5% upside from these likes between now and the end of the year,” he said. “Should we be going into a recession it will be meaningful downside, but that’s not the base case right now.”