Stocks sank as Jerome Powell gave a short and clear message that rates will stay high for some time, pushing back against the idea of a Federal Reserve pivot that could complicate its war against inflation.
The selloff was regarded by some as a "buy-on-the-rumor-sell-on-the-news" kind of reaction given that markets were already bracing for a hawkish tone from the Fed Chair in Jackson Hole, Wyoming.
The S&P 500 erased the rally notched in the previous session, while the tech-heavy Nasdaq 100 tumbled about 3%. Treasury two-year yields — which are more sensitive to imminent policy decisions — rose alongside the dollar.
Powell reiterated that another "unusually large" hike could be appropriate next month, though he stopped short of committing to one, adding that the decision will depend on incoming data.
Ahead of his speech, several officials emphasized the central bank is in no way done, with Kansas City Fed Chief Esther George noting that the destination of the federal funds rate may be higher than markets are currently priced for.
Futures contracts referencing the Fed's September policy meeting priced in roughly even odds of a half-point or three-quarter-point hike. The amount of additional tightening priced in for this year increased slightly, while traders priced in lower chances of rate cuts in 2023.
"Powell wants financial conditions to tighten further and wanted the market to know that the Fed is not ready to declare victory over inflation yet," said Joe Gilbert, portfolio manager at Integrity Asset Management. "He also renounced any prospects of interest rate cuts soon. The market is repricing this prospect and unwinding the moves from yesterday. Overall, hawkish, but not surprising."
