By YURI KAGEYAMA and MATT OTT
AP Business Writers
Wall Street futures are mostly flat a day after Federal Reserve Chair Jerome Powell told a Senate panel that interest rate hikes may increase in size if the economy and inflation don’t cool off, sending markets sharply lower.
Futures for the Dow Jones Industrial Average and the S&P 500 were off less than 0.1% before the opening bell Wednesday.
Powell will appear before a House panel Wednesday, though second-day testimony is unlikely to move markets as it did Tuesday.
The S&P 500 dropped 1.5% for one of its worst days of the year so far. The Dow Jones Industrial Average lost 574 points, or 1.7%, while the Nasdaq composite fell 1.2%.
“This is the market coming back to realistic expectations,” said Megan Horneman, chief investment officer at Verdence Capital Advisors. “I think it’s going to continue to wash out some of the excesses in the market.”
A Fed meeting later this month is expected to result in another rate hike. When Powell speaks on the Hill later in the day, traders will watch to see if he reinforces the hawkish rhetoric or tones it down, given the market reaction.
Higher rates tend to tamp down inflation as they slow spending, but the same goes for investing in everything from stocks to a home or car, and that raises the risk of tipping the economy into a recession.
Powell has confirmed that the Fed’s aggressive monetary policy is not easing, saying recent economic data suggests “the ultimate level of interest rates is likely to be higher than previously anticipated.” He also said in his testimony to a Senate committee that the Fed is ready to increase the pace of its hikes again if needed.
That would be a sharp turnaround after it had just slowed its pace of increases to 0.25 percentage points last month from earlier hikes of 0.50 and 0.75 points.
“If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,” Powell said. “Restoring price stability will likely require that we maintain a restrictive stance of monetary policy for some time.”
That means that Friday’s release of government jobs data could have a sizeable impact on the Fed’s actions. The American job market has shown little sign of cooling off meaning that spending, and prices, could continue to tick higher.
In Europe at midday, France’s CAC 40 and Britain’s FTSE 100 each shed 0.2%. Germany’s DAX moved 0.2% higher.
Japan’s benchmark Nikkei 225 edged up 0.5% to finish at 28,444.19. Australia’s S&P/ASX 200 slipped 0.8% to 7,307.80. South Korea’s Kospi dropped 1.3% to 2,431.91.
Chinese shares sank after officials in Beijing announced plans for a regulatory shakeup. Hong Kong’s Hang Seng tumbled 2.4% to 20,051.25, while the Shanghai Composite slipped less than 0.1% to 3,283.25.
“Asian shares were under pressure on Wednesday as global equities sold off after hawkish comments from Fed Chair Powell. He noted recent macro data, while possibly related to seasonal adjustments, suggest the Committee might have to raise rates higher than expected,” said Anderson Alves at ActivTrades.
The yield on the 10-year Treasury, which helps set rates for mortgages and other loans, held steady at 3.97 early Wednesday. It topped 4% last week, its highest level since November.
The two-year Treasury yield, which moves more on expectations for the Fed, continued to rise, hitting 5.03% Wednesday morning. During Powell’s testimony Tuesday, it shot up to 5.01% from 4.87% and is at its highest level since 2007.
In energy trading, benchmark U.S. crude lost 32 cents to $77.26 a barrel in electronic trading on the New York Mercantile Exchange. Brent crude, the international standard, fell 19 cents to $83.10 a barrel.
In currency trading, the U.S. dollar rose to 137.14 Japanese yen from 137.07 yen. The euro cost $1.0546, down from $1.0551.
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Kageyama reported from Tokyo; Ott reported from Silver Spring, Md.
