Stocks headed for their biggest daily decline in a month on Friday, capping a week of turbulence on Wall Street as investors struggled to calibrate their expectations for inflation and interest rates.
The S&P 500 was down as much as 1 percent before midday. A drop of that size is relatively ordinary by historical standards, but it stood out on Friday because the index had made only small moves over the past month. It also would be the fourth consecutive decline for the index.
Investors have been focused this week on the Federal Reserve and the potential for it to increase interest rates or take other steps to cut back its emergency support for the economy. The central bank said on Wednesday that it had no immediate plans to change its policy, but it did release projections that showed most officials expected interest rates to start to rise in 2023.
On Friday morning, James Bullard, the president of the Federal Reserve Bank of St. Louis, said on CNBC that it might be appropriate for the Fed to raise interest rates in late 2022. Mr. Bullard does not have a vote on monetary policy this year, but he will be a voting member of the Fed’s policy committee in 2022.
He is not in the Fed’s majority: The central bank’s so-called dot plot of rate projections suggested that 11 of the central bank’s 18 officials expected rates to remain at near-zero next year.
Even so, traders took notice of Mr. Bullard’s comments, and yields on government bonds, which are the basis for borrowing costs across the economy, briefly jumped on Friday. By late morning, however, they were lower again with the yield on 10-year Treasury notes falling to 1.47 percent.
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While higher interest rates would reflect a rebounding economy, prospects of rising borrowing costs, even far in the future, can spur investors to rethink their expectations for corporate profit growth and their appetite for risky investments.
That can whiplash the stock market. Earlier this year, stocks tumbled when bond yields rose because investors worried that a sudden rise in prices would force the Fed to begin to dial down some of its support for the economy — namely $120 billion per month in government bond purchases that are aimed at keeping cash flowing through the financial system.
And on Wednesday, in the minutes after the Fed’s newest projections were released, bond yields jumped and stocks sank. Both markets recovered by the end of the day, in part because the Federal Reserve chair, Jerome H. Powell, played down the importance of rate forecasts that will be updated many times before 2023.
“The dots are not a great forecaster of future rate moves,” Mr. Powell said during a news conference on Wednesday. He added that “rate increases are really not at all the focus of the committee” and that “liftoff is well into the future.”
The Fed nonetheless made clear this week that it was beginning to talk about a plan to slow its bond buying, the first baby step away from the emergency help it has been providing the economy. Mr. Bullard’s comments on Friday served to underscore that shift.
By midday, the S&P 500 was on track for a decline of 1.5 percent for the week. That would be its sharpest weekly drop since February. The Dow Jones industrial average has also tumbled this week and was on pace for its worst weekly showing since January.