Dow tumbles after Fed predicts it will raise rates soon

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.

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.

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.

It's just under an hour until the Federal Reserve publishes its latest monetary policy update. Analysts are already chiming in on what it might say:

"They're going to have to acknowledge in their statement that inflation has been running a bit hotter than expected," said David Kelly, chief global strategist at JPMorgan (JPM) Asset Management.

The Fed also will likely continue to argue that inflation is mostly transitory, he added.

But considering both strong economic growth and bigger-than-expected price spikes, "I do expect them to put one rate increase in their forecast for 2023," Kelly said.

And that, on its own, will be a sign that the Fed is ready to focus on a post-pandemic world.

Web hosting company GoDaddy (GDDY) has seen record growth during the pandemic as small businesses moved online.

So what's the current situation?

"We see services businesses doing better, businesses like photography or wellness," he added.

The company also has launched GoDaddy Payments, which allows customers to integrate their payment solutions with their website.

"Customers should have a choice, but so far, a majority of customers are picking the GoDaddy solution," Bhutani said.

Inflation measures show that prices are rising even though some raw material prices are coming back down.

This puts the Federal Reserve in an awkward spot, Danielle DiMartino Booth, CEO and chief strategist at Quill Intelligence, told Alison Kosik on the CNN Business digital live show Markets Now.

"I think the Fed is likely grappling with the fact that we've seen commodity prices come down... so that is working in favor of the transitory narrative," she said, but rental inflation is heating up at the same time, which could have a lasting affect.

The housing market has its own woes: too little new supply as prices and rents are soaring.

But there's an opportunity for the Fed in this: The central bank could say that its quantitative easing -- specifically the purchasing of mortgage-backed securities -- is "doing more harm than good in the housing market," DiMartino Booth said, and could move to end the purchases.

The Fed's policy decision is due at 2pm ET, with a press conference scheduled for 2:30pm ET.

Treasury Secretary Janet Yellen told lawmakers Wednesday the federal government does not know how ultra-sensitive tax documents from some of the world’s richest people was leaked to the public.

“We’re only one week out on this. And I really want to emphasize: We do not know what happened. We don’t have any facts at this point,” Yellen said during a Senate hearing.

Yellen said Treasury officials have referred the incident to the department’s inspector general as well as the Justice Department.

“This was a very serious situation, and I and the Treasury Department take very seriously the protection of government data,” Yellen said.

Her comments come after ProPublica reported on a never-before-seen trove of IRS records detailing the finances of Jeff Bezos, Elon Musk, Warren Buffett and other billionaires. The report revealed how some of the world’s richest people have legally avoided paying income tax.

“If there are any actions we need to take to shore up the protection of this information, you have my absolute word that we will do so,” Yellen said.

Republican Senator John Thune warned the IRS leak could have serious repercussions.

“This targeted attack on a select few Americans undermines the confidence in the agency that goes to the heart of the trust between taxpayers and the IRS’ ability to safeguard private information,” Thune said. 

Wall Street continues to be mixed with only the Nasdaq Composite in the green at midday.

The Dow and the S&P 500 are flat and the Nasdaq is up 0.1%.

Investors are sitting on their hands until Federal Reserve Chairman Jerome Powell starts talking at 2pm ET. The central bank has been saying that it won't change its policy stance just yet and that the spike in inflation is only transitory.

A big question for many businesses as the economy recovers is where are the workers? One answer: they may be starting their own business. 

 Americans in 2021 are starting businesses are a record rate. As of May, 2.5 million new business applications have been filed for this year alone, not adjusted for seasonal swings, according to the Census Bureau. In just 5 months, that’s already more than half of the businesses formed in 2020 – a banner year for growth. Americans started 4.4 million new businesses in 2020, a stunning 24% jump from the year before and the biggest increase on record. 

Some of these entrepreneurs lost jobs during the pandemic, according to a report by Peterson Institute for International Economics looking at the unprecedented business formation. 

“Higher local unemployment rates predict increases in U.S. entrepreneurship during past downturns,” the report said. “The more limited opportunities in the wage sector may have incentivized entrepreneurship by necessity.” 

Others likely took advantage of the billions in government stimulus for both U.S. households and businesses. Even though no direct legislation directly supported new business formation, a May study looking at data at the state level found that the implementation of relief packages directly boosted start-up formation rates. 

Many Americans starting these businesses also likely saw a niche to fill during the pandemic. According to the Census data, some of the strongest growth has been in sectors like retail, transportation and warehousing, construction, and real estate.