Asian stocks tumble on fears of faster rate hikes

TOKYO (AP) — Asian shares were mostly lower Wednesday as investors worried the Federal Reserve could raise interest rates faster if pressures on inflation remain high.

Japan’s benchmark Nikkei 225 ended up 0.5% at 28,444.19. Australia’s S&P/ASX 200 fell 0.8% to 7,307.80. South Korea’s Kospi fell 1.3% to 2,430.93.

Chinese shares sank after officials in Beijing announced plans for regulatory changes. Hong Kong’s Hang Seng fell 2.6% to 20,005.12, while the Shanghai Composite fell 0.6% to 3,266.65.

Wall Street shuddered Tuesday as Fed Chairman Jerome Powell told lawmakers the central bank would keep interest rates higher as needed to fight inflation.

“Asian shares were under pressure on Wednesday as global equity sell-offs stalled after Fed Chair Powell’s hawkish comments. He cited recent macro data, though likely seasonally adjusted, to suggest the committee may need to raise rates more than expected,” said Anderson Alves at ActiveTrades.

Another rate hike is likely as a result of a Fed meeting later this month. When Powell addresses the U.S. Congress again the following day, traders will be watching to see if the hawkish rhetoric is amplified or toned down in light of the market’s reaction.

Wall Street declined as anger over the Fed raised concerns about a potential recession down the line. The S&P 500 fell 1.5% for its worst day of the year so far, closing at 3,986.37. The Dow Jones Industrial Average lost 1.7% to 32,856.46, and the Nasdaq fell 1.3% to 11,530.33.

Inflation and what the Fed is doing about it have been at the center of sharp swings on Wall Street this year. After a steady decline since last summer, last month’s inflation report came in surprisingly hot. So did a suite of other data on the economy.

This has raised concerns that inflation is firmer than feared and that the Fed may need to raise rates more than previously thought. Higher rates can drag down inflation because they slow the economy, but they also hurt prices for stocks and other investments. They also increase the risk of later recession.

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Powell confirmed some of these fears, saying the data meant “the final level of interest rates could be higher than previously expected.” He said in his testimony to a Senate committee that the Fed was prepared to increase its pace again if necessary.

This would be a sharp reversal after it slowed growth to 0.25 percentage points last month from earlier hikes of 0.50 and 0.75 points.

“If the totality of the data indicates that rapid tightening is warranted, we will be prepared to increase the pace of rate hikes,” Powell said. “We will likely need to maintain a restrictive stance of monetary policy for some time to restore price stability.”

After sitting at virtually unchanged levels just before Powell’s testimony, stocks immediately fell.

“It’s the market coming back to realistic expectations,” said Megan Hornman, chief investment officer at Verden Capital Advisors. “I think it’s going to wash away some of the excesses in the market.”

Wall Street has largely abandoned hopes earlier this year for a possible rate cut after 2023. It also raised forecasts for how much higher the Fed would eventually raise rates before pausing.

This has been most evident in the bond market, where the 10-year Treasury yield topped 4% last week and reached its highest level since November. It helps set rates for mortgages and other important loans.

It was 4% early Wednesday.

The two-year Treasury yield, which beat the Fed’s expectations, rose from 4.87% to 5.01% and is at the highest level since 2007.

The US government’s monthly jobs report, due Friday, will provide an update on wages. The Fed’s fear is that too strong gains could push prices even higher.

The challenge for the market is that the economy has actually been very strong, despite all the rate hikes the Fed has thrown at it. This suggests that a recession may not be felt but likely means that rates will have to stay higher for longer, raising the risk of a deeper recession down the line.

In energy trading, benchmark U.S. crude fell 10 cents to $77.48 a barrel in electronic trading on the New York Mercantile Exchange. International Brent crude rose 6 cents to $83.35 a barrel.

In currency trading, the US dollar rose to 137.72 Japanese yen from 137.07 yen. The euro traded at $1.0537, down from $1.0551.

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AP Business writer Stan Cho contributed.