Stocks on Wall Street slumped at the start of trading on Wednesday, dragged lower by data that showed consumer prices rose more than expected in January, leaving the Federal Reserve little cause to lower interest rates again soon.
The S&P 500 fell roughly 1 percent as trading got underway. The Nasdaq Composite index, which is chock-full of tech stocks that have come under pressure recently from rising global competition to develop the chips that will power the development of artificial intelligence, also fell around 1 percent.
Fresh inflation data from the Bureau of Labor Statistics on Wednesday showed that prices rose 3 percent for the year through January, up from 2.9 percent in December. The “core” Consumer Price Index, which excludes volatile food and energy prices, rose 3.3 percent year-over-year.
Signs of continuing price pressure is likely to encourage the Fed to refrain from further interest rate cuts in the coming months. For stock investors, higher interest rates means slower business activity, which can weigh on companies’ earnings and stock prices.
The uptick in inflation in January “does not derail the longer-term downward trend in inflation,” said Kyle Chapman, a foreign exchange market analyst at Ballinger Group. But, he said, “it does reaffirm the consensus that cuts are going to come much more slowly than we had thought towards the end of last year.”
Investors are now betting that the Federal Reserve will keep interest rates at their current level until December. It’s a drastic shift in expectations since last year, when traders were expecting as many as four cuts for 2025, and even just a few weeks ago investors expected the next cut in rates as soon as June.
The two year Treasury yield, which is sensitive to changes in investors’ interest rate expectations, rose sharply after the inflation report, up 0.1 percentage points to 4.36 percent, close to its highest level of the year.
Wednesday’s drop comes after a bumpy three weeks for traders, with whipsaw swings in stock prices reflecting investors’ struggle to parse the flurry of executive actions taken by President Trump since he returned to the White House for a second term.
The S&P 500 has risen roughly 3 percent since the start of the year and has nudged up 1.2 percent since inauguration day, despite the volatility.
Impending tariffs are adding to concern about an acceleration in inflation. On Monday, Mr. Trump announced tariffs on foreign steel and aluminum. He has already imposed a 10 percent tariff on Chinese goods, and broad 25 percent tariffs on Canada and Mexico are set to take effect in March, after being delayed for a month.
“Rising prices already appear to be a headwind, and the prospect of new trade barriers have the potential to further fuel inflationary pressures by increasing costs for businesses and consumers,” said Jason Pride, chief of investment strategy and research at Glenmede, a wealth management firm.
