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Dow slumps nearly 350 points as bond yields climb on Powell's inflation remarks

Jessica Menton, USA TODAY
·4 min read

Stocks posted three consecutive days of losses Thursday, as comments from Federal Reserve Chair Jerome Powell did little to soothe investor concerns about a recent rise in bond yields.

The Dow Jones Industrial Average fell 345.95 points, or 1.1%, to close at 30,924.14. The S&P 500 slid 1.3% to 3,768.47, giving up an early gain after two straight days of declines.

The rise in yields renewed pressure on high-flying technology stocks, which are most vulnerable as Wall Street rethinks the value of stocks after having soared during the pandemic, making them look pricier than the rest of the market.

The Nasdaq Composite shed 2.1% to 12,723.47, wiping out its gains for the year. The tech-heavy index is off 9.7% from its Feb. 12 record, putting it within striking distance of a correction, or a drop of at least 10% from its recent peak.

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The losses came as the yield on the 10-year Treasury rose sharply during a question-and-answer session with Powell during which he said inflation will likely pick up in the coming months but the increase will be temporary, and won’t be enough for the Fed to alter its low-interest rate policies.

The remarks, signaling a wait-and-see stance on rates, failed to ease investors’ concerns that stronger growth will lead to higher inflation.

Powell acknowledged a recent rise in rates. But he gave no hint that the Fed would take steps to keep longer-term interest rates in check, such as by shifting some of its $80 billion in monthly Treasury purchases to longer-term securities.

Expectations were growing that the Fed might implement “Operation Twist," something the central bank has done in the past where it sells short-term bills and buys longer-duration bonds to flatten the yield curve and help stimulate the economy.

The yield on the 10-year Treasury note jumped to 1.54% during Powell’s remarks, from 1.47% just before, a significant move.

Treasury yields went as high as 1.50% last week as investors braced for stronger economic growth but also a possible increase in inflation. At the beginning of the year the yield was trading at 0.93%.

As the economy reopens this spring and summer, and vaccines are distributed and the coronavirus retreats, many economists expect a spending boom that will stretch available supplies of goods and services. That will likely push up prices, Powell said.

"Powell is unmoved by a Treasury market sell-off so long as it is not 'disorderly' and does not threaten broader financial market conditions," economists at Mizuho Securities USA, said in a note.

Stocks have kept closely tied with fluctuations in bond yields recently. Yields have been rising along with expectations that the economy, and possibly inflation, could be set to pick up as vaccinations increase and coronavirus restrictions on businesses, travel and schooling begin to lift more.

To be sure, inflation gains over the past year have remained modest. Even before the pandemic, inflation over the past decade has remained muted. Some experts foresee higher inflation as a positive for investors over the long haul.

"Rising yields could also be a good sign," Lindsey Bell, chief investment strategist at Ally Invest, said in a note. "Yields tend to rise early on in bull markets and economic recoveries because the outlook is improving."

Wall Street continues to look to Washington, where economic data, comments out of the Federal Reserve and President Joe Biden’s stimulus package remain key points of focus.

The Senate is moving forward with Biden’s stimulus bill, with most of the negotiations now happening between the more moderate Democrats in the Senate and the White House.

Investors are looking ahead to the February jobs report on Friday. Economists surveyed by FactSet expect employers created 225,000 jobs last month. The report also includes numbers for how much wages are rising across the economy, a key component of inflation.

The Fed still sees the labor market as far away from full employment, according to Jim Caron, portfolio manager in global fixed income at Morgan Stanley Investment Management. That means the central bank is "nowhere close" to tightening monetary policy, he said in a note.

Low inflation has helped the Fed keep interest rates at record low levels in an effort to help lift the economy out of the recession. The Fed will likely "let the economy run hotter for longer" to extend job creation for lower wage earners, he added.

The price of U.S. crude oil jumped 4.2% after OPEC members agreed to leave most of their existing oil production cuts in place. That helped send energy company stocks broadly higher. Exxon Mobil rose 3.9% and ConocoPhillips rose 3.6%.

Contributing: The Associated Press

This article originally appeared on USA TODAY: Dow sheds 346 points as yields climb on Powell's inflation remarks