Stocks tumbled as Jerome Powell gave a clear message that rates will likely stay high for some time, throwing cold water on the idea of a Federal Reserve pivot that could jeopardize its war against inflation.

The rout deepened in afternoon New York trading, with the S&P 500 seeing its worst day since mid-June and the Nasdaq 100 tumbling over 4 per cent. Major equity indexes dipped below their 100-day price averages, indicating the potential for more losses, according to some traders. Treasury two-year yields -- which are more sensitive to imminent policy moves -- rose alongside the dollar.

Hawkish Fedspeak grew louder in the last few weeks as financial conditions eased after a stock rally that began with short covering, restored US$7 trillion to values -- and ironically was linked to dovish expectations. Another reason cited by traders for Friday’s plunge was the concern that restrictive policy will raise the odds of a recession next year.

To Cliff Hodge at Cornerstone Wealth, the Fed is going to remain aggressive at the expense of growth and traders should expect more volatility and tougher conditions for equities.

“Powell can’t come right out and say that the Fed is fine walking us right into recession in order to crush inflation, but that is what this messaging unequivocally implies,” said Hodge. “What does this mean for markets? Drastically reduces the chance of a soft landing and the bull case for new highs this year.”

The Fed Chief reiterated that another “unusually large” hike could be appropriate next month, though he stopped short of committing to one, adding that the decision will depend on incoming data. Several officials have emphasized the central bank is in no way done, with Kansas City Fed Chief Esther George noting that the destination of the federal funds rate may be higher than markets are currently priced for.

Futures contracts referencing the Fed’s September policy meeting showed roughly even odds of a half-point or three-quarter-point hike. The amount of additional tightening priced in for this year increased slightly, with traders seeing lower chances of rate cuts in 2023.

“Powell wants financial conditions to tighten further and wanted the market to know that the Fed is not ready to declare victory over inflation yet,” said Joe Gilbert, portfolio manager at Integrity Asset Management. “He also renounced any prospects of interest rate cuts soon. The market is repricing this prospect.”

Former US Treasury Secretary Lawrence Summers handed out some rare praise for the Fed saying Powell’s latest pledge to restrain inflation was a “statement of being resolute.” He said the policy maker “did what he needed to do” and that it was clear the Fed’s “overwhelming priority” is pulling back inflation from the fastest pace in four decades.

Investors are rushing out of stocks and bonds alike as they worry about the economic risks from the Fed pressing on with rate hikes, Bank of America Corp. strategists said in a note before Powell’s speech.

Global equity funds had outflows of US$5.1 billion in the week through Aug. 24, with US stocks seeing their first redemptions in three weeks, according to a report from the bank, citing EPFR Global data. Rate-sensitive technology funds posted their largest exodus since November 2021, while high-yield bonds led redemptions of US$800 million from global bond funds. About US$600 million left gold.

Data Friday showed consumer spending rose less than expected as a key inflation metric turned negative. Meantime, consumer sentiment beat estimates, suggesting Americans are growing more optimistic as gas prices continue to drop.

Some of the main moves in markets:

Stocks

• The S&P 500 fell 3.4 per cent as of 4 p.m. New York time
• The Nasdaq 100 fell 4.1 per cent
• The Dow Jones Industrial Average fell 3 per cent
• The MSCI World index fell 2.5 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 0.5 per cent
• The euro fell 0.1 per cent to US$0.9965
• The British pound fell 0.8 per cent to US$1.1738
• The Japanese yen fell 0.7 per cent to 137.42 per dollar

Bonds

• The yield on 10-year Treasuries was little changed at 3.03 per cent
• Germany’s 10-year yield advanced seven basis points to 1.39 per cent
• Britain’s 10-year yield declined one basis point to 2.60 per cent

Commodities

• West Texas Intermediate crude rose 0.4 per cent to US$92.85 a barrel
• Gold futures fell 1.2 per cent to US$1,749.60 an ounce