Dow tumbles after Fed predicts it will raise rates soon

By CNN Business

Updated 6:54 p.m. ET, June 16, 2021
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4:45 p.m. ET, June 16, 2021

Stocks finish lower

From CNN Business' Anneken Tappe

Wall Street finished in the red Wednesday after the Federal Reserve signaled interest rate hikes in the next couple of years.

The central bank’s median projections put the federal funds rate at 0.6% in 2023, up from near zero now. Higher interest rates are a net negative for stocks because they mean higher borrowing costs for companies, even though they would also come on the coattails of a stronger economy.

3:23 p.m. ET, June 16, 2021

Could deflation become a problem in the future?

From CNN Business' David Goldman

As suppliers scramble to get supply to meet incredible demand, could America solve its near-term inflation problem by accidentally creating a long-term deflation problem?

That's what CNN Business' Anneken Tappe asked Federal Reserve Chairman Jerome Powell. His answer: We're not really worried about that right now.

"The problem now is that demand is very strong, incomes are high, people have money in the bank accounts. Demand for goods is extremely high, and it hasn't come down," Powell said. "But in terms of overcorrecting, there is a possibility on the other side of this that inflation could actually be quite low going forward. But that is not where our focus is right now."

Powell said there's no reason to expect prices will remain high for a long time — if prices keep soaring for travel, people will build new hotels, for example. But the timing of when prices come back in check remains uncertain, he said.

"We don't in any way dismiss the chance that it can work out that this goes on longer than expected and the risk would be that over time, it does begin to affect inflation expectations," Powell said. "If we see inflation moving up in a way that is really materially above what we would see as consistent with our goals, and persistently so, we wouldn't hesitate to use our tools to address that. We do not expect that though."

3:20 p.m. ET, June 16, 2021

Everybody calm the hell down

From CNN Business' David Goldman

When the Federal Reserve Chairman is calling Wednesday's meeting "the talking about talking about it meeting," you know he's trying to give a pacifier to Wall Street investors.

Investors weren't exactly buying the baby talk. Stocks were down a bunch, although not as bad as you'd think after the Fed finally predicted higher rates in the future.

Still, Powell did everything he could not to be a wet blanket by saying that any rate increases are coming in the far, distant future (as in 2023, or maybe next year).

"Lift off is well into the future — the conditions for liftoff are far from maximum employment for example — it is a consideration for the future," Powell said. "The near term thing is, that we learn from discussion that we will begin, is really about the path of asset purchases. As I mentioned, we had a discussion about that today. And we expect to in future meetings continue to think about our progress."
3:00 p.m. ET, June 16, 2021

What's driving prices higher?

From CNN Business' David Goldman

It's the economy, stupid.

The stock market might be freaking out about inflation today, but Federal Reserve Chairman Jerome Powell isn't. It's a normal function of the economic rebound, he says, and the data backs him up.

"If you look behind the headline numbers, the incoming data are consistent with the view that the prices that are driving that higher inflation are from categories that are being directly affected by the recovery — from the pandemic and reopening of the economy," Powell said.

He noted that lumber prices spiked because of bottlenecks but have come back down, as expected. That's true of other categories, with the notable exception of used cars — which are accounting for one third of inflation. But Powell said used car prices are soaring for reasons outside of the Fed's control.

"Used car prices are going up because of a perfect storm of strong demand and limited supply. It is going up at an amazing annual rate," Powell said. "But we do think it makes sense that that would stop and in fact it would reverse over time. We think we will be seeing some of that. When we will be seeing it we are not sure."
2:52 p.m. ET, June 16, 2021

The job market is really weird right now

From CNN Business' David Goldman

Although Federal Reserve Chairman Jerome Powell believes the job market will be "very strong" in a year or two, he acknowledged that the unusual circumstances surrounding the pandemic and economic rebound are adding uncertainty for employers and workers alike.

A few things are holding back jobs growth:

  • Finding a new job takes time.
  • A "significant" number of people still say they're concerned about going back to work and coming in contact with the public.
  • Many people are unable to go back to work because they're caring for children who aren't able to attend school or camp.
  • Special pandemic unemployment insurance has incentivized some workers to stay at home, although as Powell noted, that program expires in September.
"You put all those together, I would expect that we would see strong job creation, building up over the summer and going into the fall," Powell said. "This is an extraordinarily unusual time, and we really don't have a template or any experience of a situation like this, so I think we have to be humble about our ability to understand the data."
2:47 p.m. ET, June 16, 2021

'We're on a path to a very strong labor market'

From CNN Business' David Goldman

The American labor market is still kinda weird -- businesses want to hire, but workers don't necessarily want to go back to work just yet, leading to a labor shortage in some industries.

But Federal Reserve Chairman Jerome Powell believes we're a year or two away from returning to the jobs boom that was taking place just before the pandemic.

"If you look at the labor market and look at the demand for workers and level of job creation and think ahead, it's clear, and I'm confident that we are on a path to a very strong labor market -- a labor market that shows low unemployment, high participation, rising wages for people across the spectrum," Powell said. "I have no reason to think that that won't happen again."
2:46 p.m. ET, June 16, 2021

Dow tumbles after Fed hints at looming rate hike

From CNN Business' David Goldman

The Dow fell 300 points and the S&P 500 and Nasdaq both fell 0.8% after the Fed suggested it would raise rates sooner than expected.

Stocks had been plodding along for the past several weeks in anticipation of Wednesday's Fed update. Investors had been mostly complacent, even as multiple inflation reports showed prices were rising more than expected. Still, investors expected the Fed to largely stay the course and keep rates near rock-bottom.

To Wall Street's credit, that's pretty much what the Fed did. Rates are still zero, and most Fed governors expect rates to stay near zero throughout all of 2022. But a little less than half of Fed policymakers anticipate a rate hike next year, and most expect rates to start rising in 2023 — earlier than the Fed had previously predicted.

That's potentially bad news for stocks down the road, as higher rates could eat into corporate bottom lines, ending the easy money policy of the past 15 months.

2:26 p.m. ET, June 16, 2021

Fed sharply ramps up inflation forecast

From CNN Business' Matt Egan

The Federal Reserve is finally acknowledging the inflation elephant in the room.

Fed officials now expect their preferred gauge of inflation to climb by a brisk 3.4% during the fourth quarter of this year, according to new economic projections released Wednesday.

That's up sharply from a projection in March for inflation to rise by a gentler 2.4%. And it's well above the Fed's 2% goal.

However, the Fed is still signaling confidence this burst of inflation will pass. The median Fed official expects inflation to ease to just 2.1% in 2022, up just slightly from the March projection. Forecasts for 2023 inflation barely budged higher.

In its policy statement, the Fed again noted that "inflation has risen," but stressed this "largely" reflects transitory factors.

2:10 p.m. ET, June 16, 2021

Fed expects to raise rates sooner than you'd think

From CNN Business' David Goldman

The Federal Reserve expects to raise rates in 2023, far sooner than it previously believed as inflation continues to spike.

In its so-called dot-plot of predictions, Fed governors expect that the federal funds rate, which is currently near zero, will rise to about 0.6% by 2023. In the previous dot-plot in March, the Fed projected it wouldn't raise rates until 2024 at the earliest.

Forcing the Fed's hand is a combination of a stronger economy and rising inflation. The Fed sharply boosted its estimates for both -- predicting a 7% rise in America's gross domestic product this year, up from its previous estimate of 6.5%. But it also expects prices to grow 3.4% this year, up from 2.4% in its prior estimate.