Wall Street's realization that inflation got worse last month, not better as hoped, sent markets reeling on Friday.
The S&P 500 sank 2.9% to lock in its ninth losing week in the last 10, and tumbling bond prices sent Treasury yields to their highest levels in years. The Dow Jones Industrial Average lost 2.7%, and the Nasdaq composite dropped 3.5%.
Wall Street came into Friday hoping a highly anticipated report would show the worst inflation in generations slowed a touch last month and passed its peak. Instead, the U.S. government said inflation accelerated to 8.6% in May from 8.3% a month before.
The Federal Reserve has begun raising interest rates and making other moves in order to slow the economy, in hopes of forcing down inflation. Wall Street took Friday's reading to mean the Fed's foot will remain firmly on the brake for the economy, dashing hopes that it may ease up later this year.
"Inflation is hot, hot, hot," said Brian Jacobsen, senior investment strategist at Allspring Global Investments. "Basically, everything was up."
The growing expectation is for the Fed to raise its key short-term interest rate by half a percentage point at each of its next three meetings, beginning next week. That third one in September had been up for debate among investors in recent weeks. Only once since 2000 has the Fed raised rates that much.
"No relief is in sight, but a lot can change between now and September," Jacobsen said. "Nobody knows what the Fed will do in a few months, including the Fed."
The nation's high inflation, plus the expectations for an aggressive Fed, have sent the two-year Treasury yield to its highest level since 2008 and the S&P 500 down 18.7% from its record set in early January. The worst pain has hit high-growth technology stocks, cryptocurrencies and other particularly big winners of the pandemic's earlier days. But the damage is broadening as retailers and others are warning about upcoming profits.
The S&P 500 fell 116.96 points to 3,900.86. Combined with its losses from Thursday, when investors were rushing to lock in final trades before the inflation report, it was the worst two-day stretch for Wall Street's benchmark in nearly two years.
The Dow lost 880.00 points to 31,392.79, and the Nasdaq tumbled 414.20 to 11,340.02.
Stock prices rise and fall on two things, essentially: how much cash a company produces and how much an investor is willing to pay for it. The Fed's moves on interest rates heavily influence that second part.
Since early in the pandemic, record-low interest rates engineered by the Fed and other central banks helped keep investment prices high. Now "easy mode" for investors is abruptly and forcefully being switched off.
Not only that, too-aggressive rate hikes by the Fed could ultimately force the economy into a recession. Higher interest rates make borrowing more expensive, which drags on spending and investments by households and companies.
One of the fears among investors is that food and fuel costs may keep surging, regardless of how aggressively the Fed moves.
"The fact is that the Fed has very little ability to control food prices," Rick Rieder, BlackRock's chief investment officer of global fixed income, said in a statement. He pointed instead to mismatches in supplies and demand, higher costs for energy and wages and the crisis in Ukraine, which is a major breadbasket for the world.
That raises the threat that central banks will overly tighten the brakes on the economy, as they push against a string "and essentially fall into a damaging policy mistake," Rieder said.
The economy has already shown some mixed signals, and a report on Friday indicated consumer sentiment is worsening more than economists expected. Much of the souring in the University of Michigan's preliminary reading was because of higher gasoline prices.
That adds to several recent profit warnings from retailers indicating U.S. shoppers are slowing or at least changing their spending because of inflation. Such spending is the heart of the U.S. economy.