Stocks tumble after Fed signals rate hikes are here to stay

US stocks sank after Federal Reserve chair Jerome Powell suggested that more big interest rate hikes may be coming, even though the Fed may slow the pace of those increases. That's raising fears about a possible recession next year.

Powell conceded that the chances of a "soft landing" for the economy are lower now, adding that it's proven to be more difficult than expected for the Fed to get a handle on inflation.

• The Dow ended the day down more than 500 points, or 1.6%.
• The S&P 500 sank 2.5%.
• The Nasdaq Composite slid 3.4%.

As stocks settle after the trading day, levels might still change slightly.

Wall Street went bananas in October, believing that the Fed was about to pivot from historically high rates hikes to lower hikes to an eventual pause. But Federal Reserve Chairman Jerome Powell threw cold water on those assumptions Wednesday.

Powell said the Fed may indeed slow its pace of rate hikes starting in December -- noting that no decision has been made yet. But he also said that the Fed is nowhere near done raising rates. And even if it reduces its next and future rate increases to a half or quarter percentage point instead of three-quarters of a point, it will continue hiking rates for quite some time.

We're nowhere near a "pause." So much for the pivot Wall Street had hoped for.

That's why the October boom has turned into a November bust.

The Dow fell more than 400 points, or 1.1%.

The S&P 500 sank 2.1%.

The Nasdaq Composite was 2.9% lower.

Federal Reserve chairman Jerome Powell conceded what a lot of Americans already seem to believe. A so-called "soft landing" for the economy, one in which rate hikes do not lead to a recession, may not be in the cards.

Powell said in response to a question at Wednesday's press conference that the window for a soft landing has "narrowed" but that one is "still possible."

According to a recent poll for CNN conducted by SSRS, 75% of Americans think the economy is currently in a recession. That's up from 64% who said so in a poll earlier this summer.

When Powell was asked to clarify why he thought a soft landing may no longer be attainable, his response was not reassuring. He said it was mainly because inflation hasn't been coming down as fast as the Fed hoped.

The Fed has been raising rates sharply to try and combat inflation. And more rate hikes are likely coming. So the Fed may eventually win the fight against higher prices. But it could come at the expense of the economy.

After a series of ethics violations among Fed officials, Chair Jerome Powell said he is concerned that the public's trust in the Fed is eroding.

"The public's trust is really the Fed's and any central bank's most important asset," Powell said. "Any time one of the policy makers fall short of those rules, it risks to undermine the trust. We take that very seriously."

Powell said the Federal Open Markets Committee discussed the importance of holding itself to a higher standard when making investments.

"We've taken a number of steps. I would just say we do understand how important those issues are," Powell said. "I would say that our new investment program that we have is up now and running."

Powell noted that the most recent ethics violation, committed by Federal Reserve Bank of Atlanta President Raphael Bostic, was uncovered because of new guardrails the Fed put in place.

Stocks rose shortly after the Federal Reserve rate hike announcement was released at 2 pm ET. The Fed (and Wall Street) should have called it a day at 2:01.

Fed chair Jerome Powell continued to stress in his 2:30 press conference that the central bank will continue to be vigilant about inflation and that more big rate hikes could lie ahead.

Those comments appeared to throw cold water on the notion that the Fed may be about to pivot and slowing its rate hike pace as soon as December. Turns out that the Fed is still worried about surging consumer prices and will be watching all the upcoming reports on inflation like a...hawk.

In other words, the Fed is STILL data dependent. Cue the "Talking Heads." Same as it ever was.

• The Dow was down nearly 50 points, or 0.2%, in late afternoon trading.
• The S&P 500 fell 0.8%.
• The Nasdaq Composite was down 1.3%.

Is the Federal Reserve going to "pivot" to a slower pace of interest rate hikes in December? The market seems to think so.

According to fed funds futures trading on the CME, the market is now pricing in nearly 60% odds of just a half-point rate increase at the Fed's December 14 meeting. That would leave rates in a range of 4.25% to 4.5%. Only yesterday, traders were betting on just a 45% chance of a smaller rate hike in December.

The Fed has raised rates by three-quarters of a percentage point at each of its past four meetings. Fed chair Jerome Powell conceded in Wednesday's press conference that this was a "fast pace," but he defended the increases as "appropriate" in light of criticism from Democrats in Washington about how higher interest rates would hurt the economy. He added that the Fed has "some ways to go" with rate hikes.

Still, investors had been pricing in a 50% likelihood of a fifth consecutive three-quarters of a point hike in December before Wednesday's announcement. After the meeting, those odds fell to just 34% Wednesday afternoon.

Federal Reserve Chairman Jerome Powell said the Fed is more concerned with the appropriate interest rate target for combatting inflation than how quickly it continues to raise rates.

Although Powell opened the door to slowing the Fed's pace of hikes, perhaps raising rates by a half point in December rather than another three-quarters of a point, he noted that the Fed still has a long way to go before interest rates are sufficiently high to bring inflation down to comfortable levels.

"We think there is some ground to cover before we meet that test," Powell said. "That's why we say ongoing rate increases will be appropriate. ... We may move to higher levels than we thought."

Powell reiterated that the Fed is taking into account the fact that it's flying blind to an extent: The economic impact from monetary policy takes a while to kick in.

"That's why I've said it's appropriate to slow the pace of increases," Powell said. "So that time is coming. And it may come as soon as the next meeting or the one after that. No decision has been made."

But Powell made clear that "the question of when to moderate the pace of increases is now much less important than the question of how high to raise rates and how long to keep monetary policy restrictive." In other words: even if the Fed slows its rate hikes down, it will continue to raise rates for quite some time.

Federal Reserve Chairman Jerome Powell said the Fed is aware that monetary policy decisions don't have an immediate impact on the economy, and that it needs to monitor the lag to ensure it doesn't crash the economy into a recession. The Fed also knows it can't maintain this historic pace of rate hikes forever.

But the key question remains: when will rate hikes slow down? The Fed seemed to be hinting in its statement Wednesday that it could begin to slow down its hikes as early as next month. But Powell was cagey in his remarks at his press conference.

Rates will be higher than expected before they start to come down, Powell noted. And uncertainty remains around just when the Fed will change its policy.

"At some point, as I've said in the last two press conferences, it will become prudent to slow the pace of increases," he said. "There is significant uncertainty around that level of interest rates. Even so, we still have some ways to go. And incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected."

Those comments spooked investors. Stocks, which were up sharply following the Fed's decision, are now lower.

During his opening remarks following another three-quarter-point rate hike, Federal Reserve Chairman Jerome Powell acknowledged that rate hikes have been difficult on Americans and businesses.

"The Fed's monetary policy actions are guided by our mandate for stable prices for the American people," Powell said. "My colleagues and I are acutely aware that it poses significant hardship as it erodes purchasing power especially for those least able to meet the higher costs of essentials like food, housing, and transportation."

A growing chorus of Democratic lawmakers have chastised the Fed for fighting inflation with limited success while, in turn, reducing job opportunities for Americans

But Powell defended the Fed's actions, noting that high inflation also poses a great risk to the health of the American economy.

"Reducing inflation is likely to require a sustained period of below trend growth and softening of labor market conditions," Powell said. "Restoring that price stability is essential to set the stage for achieving stable employment and stable prices in the longer run."