Wall Street tumbles as Fed sparks recession fears

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By Chuck Mikolajczak

NEW YORK (Reuters) - U.S. stock indexes tumbled on Thursday, with both the Dow and S&P 500 poised for their biggest daily percentage drop in three months, as concerns mounted that the Federal Reserve's battle against inflation using aggressive interest rate hikes could lead to a recession.

The U.S. central bank hiked rates by 50 basis points (bps) on Wednesday, dialing back from the four back-to-back 75 bps hikes, but Fed Chair Jerome Powell warned recent signs of inflation may be waning were not enough to convince Fed the battle against rising prices had been won.

The Fed projected continued rate hikes to above 5% in 2023, a level not seen since a steep economic downturn in 2007.

"That is what is a concern for the market, that the Fed is going to overreach," said Quincy Krosby, chief global strategist at LPL Financial (NASDAQ:LPLA) in Charlotte, North Carolina.

"What the market is saying is if you continue this way, a recession is basically a done deal."

Adding to global recession worries, the Bank of England and the European Central Bank further indicated an extended hiking cycle on Thursday. Most major central banks have followed a rate hike strategy in an attempt to reign in inflation.

The Dow Jones Industrial Average fell 906.27 points, or 2.67%, to 33,060.08; the S&P 500 lost 112.92 points, or 2.83%, to 3,882.4; and the Nasdaq Composite dropped 384.91 points, or 3.45%, to 10,785.97.

The S&P 500 and Dow were on track for their biggest daily percentage drop since Sept. 13, with the Nasdaq on pace for its biggest drop since Oct. 7.

Equities have rallied since hitting lows for the year in mid-October, as signs of cooling inflation sparked optimism that the end of the Fed's rate hike path could be on the horizon, but the rally has fizzled in December as investors see mixed economic data and a resolute Fed as having increased the chances of a recession.

Money market participants expect at least two 25 bps rate hikes next year and borrowing costs to peak at about 4.9% by midyear, before falling to around 4.4% by year-end.

Investors also assessed economic data on Thursday that showed a steeper-than-expected decline in retail sales in November and the number of Americans filing for unemployment benefits falling last week, indicating a tight labor market. The labor market will need to weaken in order to help inflation ease.

All the 11 major S&P 500 sectors were in the red, with communication services and technology stocks falling about 4% as the worst performing on the session.

Netflix Inc (NASDAQ:NFLX) slumped 9.26% after a media report that the company would let its advertisers take their money back after missing viewership targets.

Nvidia (NASDAQ:NVDA) Corp dropped 9.26% after HSBC Global Research began coverage of the chipmaker's stock with a "reduce" rating.

Declining issues outnumbered advancing ones on the NYSE by a 4.98-to-1 ratio; on Nasdaq, a 3.19-to-1 ratio favored decliners.

The S&P 500 posted one new 52-week high and seven new lows; the Nasdaq Composite recorded 51 new highs and 289 new lows.