Markets fall as Fed’s James Bullard warns rate hikes must be bigger

Bullard’s comments raised the prospect that Fed rate hikes will make it even more expensive for consumers and businesses to borrow and further increase the risk of a recession. Wall Street traders expressed their concern by sending stock market futures further into the red early Thursday. The Dow Jones Industrial Average was down around 330 points just before trading began.

Bullard’s comments followed speeches by other Fed officials in recent days who have suggested they see only limited progress in using steadily higher interest rates to fight inflation.

The Fed’s short-term policy rate “has not yet reached a level that could be justified as sufficiently restrictive,” Bullard said. “In order to reach a sufficiently restrictive level, the key interest rate must be increased further.”

The Fed is keen to raise lending rates to levels that slow economic growth and hiring to cool inflation.

The central bank has been quick to raise interest rates by an aggressive three-quarter point at each of its last four meetings — the fastest string of rate hikes since the early 1980s. The cumulative effect has been to make many consumer and business loans more expensive and increase the risk of a recession.

These hikes have pushed the Fed’s short-term interest rate to a range of 3.75% to 4%, from almost zero last March to its highest level in almost 15 years.

Bullard suggested the rate might need to rise to levels between 5% and 7% to quell inflation, which is near a four-decade high. However, he added that this level could fall as inflation cools in the coming months.

AP’s earlier story follows below.

Stocks open lower on Wall Street and Treasury yields rise after further hints from the Federal Reserve that the central bank may need to raise interest rates much more than many people expect to get inflation under control. The Fed has been aggressively raising interest rates to tame inflation by slowing the economy. The S&P 500 was down 1.1% early Thursday and the tech-heavy Nasdaq was down slightly more, down 1.2%. The Dow lost 0.8%. The yield on the two-year government bond fell to 4.45%.

THIS IS A BREAKING NEWS UPDATE. AP’s earlier story follows below.

Wall Street pointed to more losses before US markets opened on Thursday, as concerns that the Federal Reserve might not ease its aggressive rate hikes outweighed last week’s optimism that the central bank might be able to pull back.

Dow Jones Industrials futures fell 0.7% and S&P 500 futures fell 0.9%.

The Fed has been raising interest rates at a rapid pace to slow the economy and tame the hottest inflation in decades. Analysts and investors have feared it could hit the brakes too hard and trigger a recession.

“Markets are still unconvinced that the Federal Reserve will decide to hike rates on a smaller scale as the incoming data sent mixed signals,” said Mizuho Bank’s Venkateswaran Lavanya.

US retail data has shown improvement while industrial production has declined, underscoring the resilience of the services sector amid weaker external demand.

This week’s US government October Retail Sales report showed that consumer spending remained strong – up 1.3% from September to October – although it’s unclear whether this was due to more buying or higher prices.

Strong consumer spending is usually a good sign for the economy, but could complicate the Fed’s strategy to cool the economy. A strong labor market with an unemployment rate of just 3.7% complicates the Fed’s strategy.

Earlier this month, as part of its anti-inflation strategy, the Fed increased its short-term lending rate by another 0.75 percentage point, three times the usual margin, for the fourth time this year. The key interest rate is now in a range of 3.75% to 4%.

More gains are likely to come, although there has been some hope that the Fed will ease as more evidence arrives that prices have peaked.

The Labor Department reported last week that consumer inflation hit 7.7% yoy in October, the smallest yoy rise since January. Excluding volatile food and energy prices, “core” inflation rose 6.3% over the past 12 months. Labor reported this week that wholesale prices have fallen for the fourth straight month.

But those numbers, which came in better than analysts expected, may not be enough to convince Fed officials to backtrack on their expected rate hike at next month’s meeting.

In Europe, France’s CAC 40 was down 0.8% during midday trade, Germany’s DAX was down 0.2% and Britain’s FTSE 100 was down 0.6%.

Japan’s benchmark Nikkei 225 lost 0.4% to close at 27,930.57. Australia’s S&P/ASX 200 was up 0.2% to 7,135.70 after government data showed that October’s employment situation improved from September.

South Korea’s Kospi slipped 1.4% to 2,442.90. Hong Kong’s Hang Seng fell 1.2% to 18,045.66, while the Shanghai Composite fell 0.2% to 3,115.43.

China maintains its “zero-COVID” approach of testing many people en masse alongside localized lockdowns and quarantines to completely eliminate the coronavirus. Such restrictions have caused supply shortages for some of Asia’s largest manufacturers and hampered economic growth.

Elsewhere, the lifting of pandemic restrictions has raised hopes of higher consumer spending and tourism revenue.

Japan posted a trade deficit for the 15th straight month in October as both imports and exports hit record highs amid rising energy and food costs and a falling yen, according to government data released on Thursday.

The deficit was 2.16 trillion yen (15 billion yen) from a year ago. The products that boosted exports included vehicles, medical products and electric machinery, according to the ministry.

Also hanging over market sentiment, particularly in the energy sector, is the war in Ukraine. Any deterioration could lead to price spikes for oil, gas and other commodities produced in the region.

In energy trading, the benchmark US crude slipped $1.80 to $83.79 a barrel. US crude prices initially rose before settling 1.5% lower on Wednesday. Brent crude, the international standard, fell $1.49 to $91.37 a barrel.

In forex trading, the US dollar rose to 140.14 Japanese yen from 139.51 yen. The euro cost $1.0332 compared to $1.0396.

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Kageyama reported from Tokyo; Ott reported from Washington.