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Stocks Fall After Powell’s Taper Comments

Stocks fell sharply on Wall Street on Tuesday, driven lower by the likelihood that the Federal Reserve will hasten the removal of its supports for the economy just as a worrying new variant of the coronavirus has begun to spread.

The Federal Reserve chair, Jerome H. Powell, told a Senate committee on Tuesday that inflation was likely to persist well into next year and that the Fed would consider tapering off its bond-buying program more quickly in response.

“At this point, the economy is very strong, and inflationary pressures are high,” Mr. Powell said during a hearing before the Senate Banking Committee. “It is therefore appropriate in my view to consider wrapping up the taper of our asset purchases, which we actually announced at our November meeting, perhaps a few months sooner.”

The Fed’s efforts have been a crucial factor in the swift rise of stocks since the start of the pandemic. The S&P 500, which had been down roughly 0.5 percent for much of the morning, tumbled after of Mr. Powell’s comments. The index was down 1.7 percent at midday, more than giving up its gains from Monday.

Short-term bond yields, which are heavily influenced by expectations for Fed rate hikes, spiked. The yield on the two-year Treasury note rose to 0.56 percent from roughly 0.43 percent in relatively short order, as investors interpreted Mr. Powell’s statements as an acknowledgment that inflation — which the central bank has long described as “transitory” — would force the Fed toward favoring higher interest rates sooner than many investors had expected.

“The Fed is the ultimate owner of the ‘transitory’ characterization, and the chair’s decision to move beyond that is a decidedly hawkish step,” Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York, wrote in a note to clients shortly after Mr. Powell’s comments.

Stocks prices were falling around the world before Mr. Powell’s testimony as investors struggled to understand the danger posed by the Omicron variant. The Stoxx Europe 600 fell 0.4 percent. In Asia, the Nikkei 225 in Japan and the Hang Seng in Hong Kong had each dropped more than 1 percent.

Investors have been closely watching updates on the Omicron variant since last week, and remain particularly attuned to the effectiveness of vaccines against it.

The chief executive of Moderna, a vaccine maker, said in an interview on Tuesday that there could be a “material drop” in the effectiveness of current vaccines to the new variant. The executive, Stéphane Bancel, told The Financial Times that it might be months before an Omicron-specific vaccine could be produced at scale, but added that it would be risky to shift the company’s entire vaccine production while other variants are still prevalent.

Financial markets have been unsteady since the discovery of the new variant in southern Africa late last week. The S&P 500 suffered its worst day since February on Friday, dropping 2.3 percent. On Monday, it began to recover as politicians around the world cautioned against panic, even as some put travel bans in place. Relatively little is known about the Omicron variant. Scientists have detailed its mutations, and it will be a couple of weeks before they know how it responds to existing vaccines and if it causes severe disease.

Still, investors say it’s unlikely that the Omicron variant would trigger the same kind of response from governments, business or individuals as it did when Covid first emerged in early 2020. Even if Omicron is a greater threat than the Delta variant before it, investors expect the market effects of the virus’s new iteration will most likely be far less than the nearly 34 percent crash share prices suffered between February 2020 and the following month.

“The worst case is not March 2020 again,” said Jeb Breece, principal at Spears Abacus, an independent money management firm in Manhattan. “Fear and unknowns were such a big component of that. I don’t see us doing that again.”

Coral Murphy Marcos contributed to this report.

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