Stocks fell for a second day on Wednesday and rates soared to new heights after the Federal Reserve gave more guidance on how fast it will tighten monetary policy to fight inflation, raising concerns it may slow the economy.
The Dow Jones Industrial Average fell 144.67 points, or 0.42%, to 34,496.51. The S&P 500 slid 0.97% to 4,481.15, and the Nasdaq Composite sank another 2.22% to 13,888.82 after falling about 2.3% on Tuesday.
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"It was a warning to anyone who thinks that the Fed is going to be more dovish in their fight against inflation," said Quincy Krosby, chief equity strategist at LPL Financial. "Their message is, 'You're wrong.'"
The Fed's release of its meeting minutes indicated on Wednesday afternoon that officials "generally agreed" it should shrink its balance sheet by $95 billion per month. The minutes also showed central bank officials were considering larger rate hikes than the usual 25-basis-point, or quarter-point, increments. Stocks dipped to session lows after the release of the minutes but bounced back slightly to end the day.
"Many participants noted that — with inflation well above the Committee's objective, inflationary risks to the upside, and the federal funds rate well below participants' estimates of its longer-run level — they would have preferred a 50 basis point increase in the target range for the federal funds rate at this meeting," the minutes said.
Meanwhile, the 10-year Treasury yield jumped above 2.65% to a three-year high on Wednesday and remained near that high following the release of the Fed meeting minutes. The rate ended Monday at 2.40%. The minutes were from the Fed's March meeting when it raised rates by a quarter point and indicated six more hikes of that magnitude were coming this year.
"I think the stock market is getting the idea that $60 billion Treasurys and $35 billion in mortgages is starting to get real," said James Caron of Morgan Stanley Investment Management. "If they do another 50 basis points hike in May and another 50 in June, it's starting to get more real. It's certainly not a tailwind for stocks."
Tech shares led Wednesday's slide, falling again for a second day as investors rotated out of the group and braced for higher rates to slow the economy. Apple, Microsoft, Amazon and Tesla contributed to the sector's decline. Chipmakers like Nvidia and Marvell Technology also continued their descent, falling about 5.9% and 2.6%, respectively.
Investors continued to search for stocks with stable profits, shying away from those offering future growth. Utilities, health care and consumer staples sectors continued to climb Wednesday, with Amgen and Johnson & Johnson rising more than 2% each. Consumer staples such as Coca-Cola and Procter & Gamble inched more than 1% higher. Walmart jumped 2.3%.
"Today and yesterday you're really starting to see the equity market catch up with the bond market," said Chris Zaccarelli, CIO at Independent Advisor Alliance. "And by that, I mean equities are starting to price in a more aggressive Fed. You're starting to see a bid for safety, you're seeing that classic risk-off move."
Officials in recent days have tried to warn investors even faster policy tightening could be ahead. The findings, coupled with recent remarks from Fed Governor Lael Brainard and others, seemed to signal that sentiment.
Earlier Wednesday, Philadelphia Federal Reserve President Patrick Harker said that he is "acutely concerned" about rising inflation, noting that he expects "a series of deliberate, methodical hikes as the year continues and the data evolve."
His comments come less than a day after Brainard indicated support for higher interest rates and said a "rapid" reduction of the central bank's balance sheet could come as soon as May. The remarks pushed stocks lower in the previous session.
"It is of paramount importance to get inflation down," Brainard said during a Minneapolis Fed webinar. San Francisco Fed President Mary Daly echoed similar sentiments toward inflation on Tuesday.
"What that means for the markets are continued volatility around the uncertainty to higher rates and lower-income cash flow stocks, growth type stocks probably continuing to get discounted as rates rise," Cliff Corso of Advisors Asset Management said on CNBC's "Worldwide Exchange."
Traders were also bracing Wednesday for the start of the corporate earnings season.
Goldman Sachs chief U.S. equity strategist David Kostin said Wednesday on CNBC's "Squawk on the Street" that stocks with "resilient margins" are better prepared to weather the current environment. That includes names such as Alphabet and Nike — which have maintained "high and stable margins" even amid the pandemic, he said.
"Overall, the U.S. equities market maybe has 5% upside from these likes between now and the end of the year," Kostin said. "Should we be going into a recession it will be meaningful downside, but that's not the base case right now."
— CNBC's Patti Domm and Jeff Cox contributed reporting