Wall Street slumps as Powell's speech reinforces hawkish rate stance

© Reuters. FILE PHOTO: Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., August 15, 2022. REUTERS/Brendan McDermid/File Photo

By David French and Bansari Mayur Kamdar

(Reuters) - Wall Street tumbled on Friday after Federal Reserve Chief Jerome Powell signaled the central bank would keep raising interest rates to tame inflation, dashing investors' hopes that the Fed's aggressive approach to hikes might be modified soon.

The Nasdaq led declines among the three U.S. benchmarks, on track for its worst day in two months, weighed by high-growth technology stocks which slumped after rallying the previous day in anticipation of Powell's scheduled speech to the Jackson Hole central banking conference in Wyoming.

The U.S. economy will need tight monetary policy "for some time" before inflation is under control, Powell said. That means slower growth, a weaker job market and "some pain" for households and businesses, he added.

"His comments were hawkish, he's keeping the pedal to the metal here when it comes to policy to fight inflation," said Lindsey Bell, chief money and markets strategist at Ally.

All the 11 major S&P 500 sectors were lower, led by falls of between 3.1% and 3.3% in the information technology, communication services and consumer discretionary indexes.

Weighing on megacap growth and technology stocks, the U.S. two-year Treasury yields briefly popped to their highest levels since October 2007 before stabilizing near two-month highs.

High-growth and technology stocks dropped.

Having led gainers in the previous session, Nvidia (NASDAQ:NVDA) Corp and Amazon.com Inc (NASDAQ:AMZN) fell 7.9% and 3.8%, respectively. Meanwhile, Google-parent Alphabet (NASDAQ:GOOGL) Inc, Meta Platforms Inc, and Block Inc dipped between 3.5% and 7.2%.

Economy-sensitive banks fell 2.6%.

"The market is reacting pretty negatively because if you look at expectations for where the fed funds rate goes this year and next year, the market was anticipating that the Fed backs off in the next year and nothing that Powell said suggests that would be the case," said Bell.

U.S. stock indexes have retreated since the turn of the year as investors priced in the expectation of aggressive interest rate hikes and a slowing economy.

But they have recovered strongly since June, with the S&P 500 recouping nearly half its losses for the year on stronger-than-expected quarterly earnings and hopes decades-high inflation has peaked.

Traders were still divided between a 75-basis-point and a 50-basis-point hike by the Fed, while economists see the central bank lifting rates by 50 basis points at its meeting next month.

At 1:49 p.m. ET, the Dow Jones Industrial Average was down 694.73 points, or 2.09%, at 32,597.05, the S&P 500 was down 101.09 points, or 2.41%, at 4,098.03, and the Nasdaq Composite was down 373.51 points, or 2.96%, at 12,265.76.

Data earlier showed consumer spending barely rose in July, but inflation eased considerably, which could give the Fed room to trim its aggressive interest rate increases.

Dell Technologies (NYSE:DELL) Inc fell 11.6% as it joined rivals in predicting a slowdown as inflation and the darkening economic outlook prompt consumers and businesses to tighten their purse strings.

Affirm Holdings Inc tumbled 21.8% after the buy-now-pay-later lender forecast full-year revenue below Wall Street estimates, underscoring the broader downturn in the fortunes of the once high-flying fintech sector.