US stocks slumped after Federal Reserve Chair Jerome Powell reiterated his commitment to curb inflation and acknowledged the risk of recession, even as some traders now expect the central bank to closely monitor the impact of its rate hikes on the economy.

The S&P 500 snapped a two-day rally and the tech-heavy Nasdaq 100 also fell. Treasury yields declined with the 10-year yield hovering around 3.15 per cent. The dollar fell after earlier gains while other safe haven assets such as gold climbed.

Testifying in the Senate Wednesday, Powell made no reference to the size of future hikes, but tacitly admitted that the Fed has failed to get its job done and said it would be difficult to engineer a soft landing. Stocks wavered during the session as some investors found reassurance in Powell’s comments as a signal that the Fed will factor in economic fundamentals and the probability of a recession as it moves to curtail inflation.

“He has acknowledged that rates will continue to increase, but the FOMC committee is cognizant of watching incoming data suggesting the Fed will not be exclusively on autopilot with tightening,” said Joe Gilbert, portfolio manager for Integrity Asset Management. 

Powell’s tone was perceived as “less hawkish than feared” because there was no mention of the “unconditional” commitment to bring down inflation at the cost of higher unemployment, Evercore ISI’s Krishna Guha and Peter Williams wrote in a note.

“The Fed monitors how the media and others respond to its communications carefully, so we doubt this omission was an accident,” they write.

The odds of the Fed’s rate hiking cycle extending beyond the November policy meeting, which is the week before US mid-term elections, have diminished sharply as traders continue to price the prospects of a hard-landing and swifter policy reversal next year.

Others still expect more uncertainty on the horizon as investors parse Powell’s testimony and comments from former New York Fed President Bill Dudley who said, in a Bloomberg Opinion column Wednesday, that a recession is “inevitable” within the next 12 to 18 months. 

“No one’s going to want to come in and want to buy a market, put anything significant into the market while you’re getting this all-over-the-place volatility,” Shawn Cruz, head trading strategist at TD Ameritrade, said in an interview at Bloomberg’s New York headquarters. 

The market continues to be skeptical about the outlook for risk assets. Deutsche Bank AG’s Chief Executive Officer Christian Sewing joined a growing chorus of executives and policy makers who warn that the global economy may be headed for a recession as central banks step up efforts to curb inflation. 

Bitcoin briefly dropped below its US$20,000 key level as investors remain concerned about a global recession. Powell said, on Wednesday, that there are no significant macro effects so far from the crypto decline. He also said that Congress should clarify who has the authority to regulate it.

What to watch this week:

• Powell US House testimony, Thursday
• US initial jobless claims, Thursday
• PMIs for euro zone, France, Germany, UK, Australia, Thursday
• ECB economic bulletin, Thursday
• US University of Michigan consumer sentiment, Friday
• RBA’s Lowe speaks on panel, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.1 per cent as of 4 p.m. New York time
• The Nasdaq 100 fell 0.2 per cent
• The Dow Jones Industrial Average fell 0.2 per cent
• The MSCI World index rose 1.9 per cent

Currencies

• The Bloomberg Dollar Spot Index fell 0.2 per cent
• The euro rose 0.3 per cent to US$1.0567
• The British pound was little changed at US$1.2265
• The Japanese yen rose 0.2 per cent to 136.25 per dollar

Bonds

• The yield on 10-year Treasuries declined 13 basis points to 3.14 per cent
• Germany’s 10-year yield declined 13 basis points to 1.64 per cent
• Britain’s 10-year yield declined 16 basis points to 2.50 per cent

Commodities

• West Texas Intermediate crude fell 3.7 per cent to US$105.46 a barrel
• Gold futures were little changed