US shares drop as higher inflation raises fears of Federal Reserve rate hikes

US stocks closed lower on Tuesday as a higher-than-expected inflation reading increased fears that the Federal Reserve will raise interest rates next month. The Labor Department reported that the Consumer Price Index rose 0.4% last month, which is the third straight gain of 0.4% or more and higher than the 0.3% estimate from economists polled by Reuters.

Market Impact

The S&P 500 lost 28.46 points to end at 7,521.48 points, while the Nasdaq Composite fell 185.90 points to 25,067.23. The Dow Jones Industrial Average dropped 161.95 points to close at 52,227.80. The S&P 500 technology sector dropped more than 1% as the worst-performing sector, weighed down by Nvidia shares falling nearly 6%. Nvidia has tumbled about 10% over the past two sessions amid an internal probe into spy claims involving Chinese businesswoman Alice Huang and CEO Jensen Huang.

Fed Officials and Rates

Markets are now fully pricing in a rate hike of at least 25 basis points at the December meeting, according to CME FedWatch, up from 84% on Monday. Expectations for a 50 basis point increase climbed to 11.8%. Fed Governor Christopher Waller stated the central bank should raise short-term borrowing costs in December even if inflation cooled last month. Dallas Federal Reserve President Lorie Logan said the Fed needs to deliver at least two more quarter-point interest rate increases, and Kansas City Federal Reserve President Jeff Schmid stated current policy rates are fairly accommodative.

Context

Central banks like the Federal Reserve use interest rate hikes to slow down economic activity and bring down high inflation when prices rise faster than expected. Higher borrowing costs make loans and credit more expensive for businesses and consumers, which often leads to a drop in stock prices as investors reassess company profits.