Stocks fall on fear the Fed will get even more aggressive to fight inflation, Nasdaq loses 1.8%

Stocks fell on Tuesday as Federal Reserve Governor Lael Brainard signaled the central bank may take a more aggressive approach to tighten policy to fight inflation.

The S&P 500 lost 0.5% after posting two-straight days of gains. The Nasdaq Composite shed 1.5%, stepping back a 1.9% pop in the prior session. The Dow Jones Industrial Average lost about 30 points.

After opening the day slightly positive, stocks hit their lows of the session and rates hit their highs after Brainard, who is typically considered one of the more dovish Fed members, said Tuesday that the central bank needs to shrink its balance sheet “rapidly” to drive down inflation.

“Inflation is much too high and is subject to upside risks,” she said, noting the Fed needed a steady pace of rate hikes as well.

The 10-year Treasury yield jumped to 2.56% following her comments, its highest level since May 2019.

Deutsche Bank on Tuesday became the first major Wall Street bank to forecast a U.S. recession is ahead, citing the Fed getting more aggressive to fight inflation.

“The US economy is expected to take a major hit from the extra Fed tightening by late next year and early 2024,” the bank’s economists said in a note to clients Tuesday. “We see two negative quarters of growth and a more than 1.5% pt rise in the US unemployment rate, developments that clearly qualify as a recession, albeit a moderate one.”

Tuesday’s moves come as investors await the release of Federal Reserve meeting minutes on Wednesday. Those minutes were for the meeting last month where the central bank hiked rates for the first time in years and indicated six more hikes were ahead this year.

Tech shares were lower, led by chip stocks, consolidating their big gains from Monday. Some believe this group could be hurt the most by the Fed’s hiking campaign as investors take less risk and buy stocks with steady profits, rather than growth shares promising big earnings down the road.

Nvidia lost 3% while Amazon and Tesla were each lower. Still, Twitter shares added another 3% to their 27% Monday gain after Elon Musk said he will join the company’s board of directors a day after revealing a 9.2% stake in the social media giant.

Sectors that hold up well in a slowing economy like utilities and healthcare also moved higher on Tuesday. Drugmakers Johnson & Johnson and Pfizer rose more than 1.5% and staples like Procter & Gamble and Walmart were also higher. Meanwhile, cruise stocks like Carnival, Norwegian Cruise Line, and Royal Caribbean added 1%.

“The way the market is acting today, the playbook is defense with commodities linked sectors outperforming, while technology underperforms on the concern of high interest rates,” said Keith Lerner co-CIO and chief market strategist at Truist. “There’s concern about the economy and the fed’s ability to maneuver a soft landing.”

As the Russia-Ukraine war continues, investors watched Ukrainian President Volodymyr Zelenskyy for a Nuremberg-like tribunal to hold Russia accountable for alleged war crimes, during an appearance before the United Nations Security Council on Tuesday.

Oil prices stepped back earlier gains on Tuesday, with West Texas Intermediate dipping 0.5% at $102.76 per barrel and Brent crude falling 0.4% to $107.10. The market has been volatile since the onset of the war amid concerns over supply disruptions.

The new quarter has kicked off after the major averages finished their worst quarter in two years. Investors are preparing for the first-quarter corporate earnings season, which is set to begin next week.

— CNBC’s Patti Domm contributed reporting