Stocks fall sharply on Wall Street after the Fed hints that it will continue to raise interest rates

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Investors reacted negatively to the words of Loretta Mester, president of the Cleveland Federal Reserve, who assured that the intervention in the economy was not ended by part of the Central Bank of the United States

Sharp drop in stocks on Wall Street after the Fed hinted at further interest rate hikes

Fed chief Jerome Powell on screens at the New York Stock Exchange (REUTERS/Andrew Kelly)

Stocks fell on Wall Street on Wednesday afternoon after a senior official of the Federal Reserve to say that the central bank needs to keep raising interest rates to control inflation. The remarks came on the heels of new data showing consumers reined in retail spending last month.

The S&P 500 index fell 1.6%, the Dow Jones fell 1.8% and the Nasdaq Composite < /b>was down 1.2 percent.

Trading has been shaky so far this week, following two solid weekly gains.

Technology stocks were among the top performers in the market. Microsoftit fell 1.2% after becoming the latest tech company to announce layoffs. The software giant is cutting 10,000 workers, nearly 5% of its workforce.

Treasury yields fell sharply after the government reported that Americans cut spending more than expected last month, the second decline in a row. The Government also published some inflation datamore encouraging. Wholesale prices rose 6.2% in December from a year earlier, marking the sixth consecutive slowdown in the measure of prices before they are passed on to consumers.

The 10-year Treasury yield, which influences interest rates on mortgages and other loans, fell to 3.39% from 3.55% on Tuesday.

The two-year Treasury yield, which follows expectations of further action by the Federal Reserve, fell to 4.09% from 4.16% prior to the release of the latest economic data. As of late Tuesday, it was as high as 4.21 percent.

“It looks like something is moving inflation and retail sales in the right direction, namely smoother,”, said Tom Martin, portfolio manager at Globalt Investments. “The question is what it really means.”

Wall Street has been hoping that easing inflation and slowing economic growth could influence the Federal Reserve's rate stance of interest.The central bank aggressively raised rates throughout 2022 in an effort to cool hot inflation, but that has hurt stock and bond prices, and risks going too far and triggering a recession.

Although there are increasing signs that high inflation is finally subsiding, further rises of rates, according to Loretta Mester, president of the Federal Reserve Bank of Cleveland,

“I still see the greatest risk in tightening too little,” Mester said in an interview Tuesday with the AP news agency.

Mester insisted on his conviction that the Federal Reserve's official interest rate should rise “a little” above the range of 5% to 5.25% that policy makers have collectively projected for later this year.

The central bank has raised its overnight interest rate to a range of 4.25% to 4.50%, from around zero a year ago. The Fed will announce its next decision on interest rates on February 1. Investors expect a rise of just 0.25 percentage points next month, less than December's half-point rise and the previous four rises of 0.75 percentage points.

The overall economic picture is not yet clear enough to know if the Federal Reserve's fight against inflation is working well enough to avoid a recession. Several major banks have forecast at least a mild recession sometime in 2023.

Investors are also checking out the latest batch of corporate earnings to learn more about how inflation and spending of consumers are affecting profits and income. PNC Financial Services Group fell 5.4% after posting weak results.

European and Asian markets were mostly up. Japan's Nikkei 225 rose 2.5% after the Bank of Japan kept its loose monetary policy unchanged, allaying speculation that it would cave to pressure and join other central banks in raising interest rates to fight inflation.

(With information from AP)

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