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Dow Sinks and Treasury Yields Spike on Powell's Inflation Comments

Stocks end sharply lower as Wall Street focuses on comments about inflation from Federal Reserve Chairman Jerome Powell.

Stocks finished sharply lower Thursday after Federal Reserve Chairman Jerome Powell said that a recent surge in Treasury yields caught his attention but that the central bank would be patient before changing policy even if inflation were to tick higher.

The Dow Jones Industrial Average finished down 346 points, or 1.11%, to 30,923, the S&P 500 declined 1.34% and the tech-heavy Nasdaq Composite tumbled 2.1%. The Nasdaq turned negative for the year.

At one point the Dow was down as much as 722 points, or 2.3%.

Leading the Dow lower on Thursday were chipmaker Intel  (INTC) - Get Intel Corporation Report, down 2.6%, and home-improvement retailer Home Depot  (HD) - Get Home Depot Inc. (The) Report, off 2.5%.

The top laggard in the Nasdaq 100: Marvell Technology  (MRVL) - Get Marvell Technology Inc. Report, giving back 12%.  A number of other chipmakers and related companies were lower as well, including Applied Materials  (AMAT) - Get Applied Materials Inc. Report, ASML Holding  (ASML) - Get ASML Holding N.V. Report, Microchip Technology  (MCHP) - Get Microchip Technology Incorporated Report and Micron  (MU) - Get Micron Technology Inc. Report.

The yield on the benchmark 10-year Treasury rose to 1.554% after Powell said Thursday at a webinar hosted by The Wall Street Journal that a recovering economy could "create some upward pressure on prices.” He noted, however, that he expects a rise in inflation to be "transitory."

Powell said that since the Fed remains "a long way" from achieving its goals, a "lot of ground" would have to covered before it would tighten interest rates.

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"We want inflation expectations to be anchored at 2%," Powell said. "Inflation is running below 2% and has done so since the pandemic arrived." 

Powell's comments could prove crucial for a stock market that has been acutely sensitive to the surge in bond yields and accelerating inflation expectations linked to President Joe Biden's $1.9 trillion stimulus bill and the ongoing progress in the U.S. vaccine rollout.

An anticipated increase in inflation and expectations of higher borrowing costs have investors questioning the valuations of high-flying tech giants such as Apple  (AAPL) - Get Apple Inc. Report, Microsoft  (MSFT) - Get Microsoft Corporation Report and  (AMZN) - Get Inc. Report.

Those concerns sent stocks lower on Wednesday with the tech-heavy Nasdaq slumping 2.7%. The Nasdaq recorded its worst two-day decline since September as benchmark Treasury yields rose to near 1.5%.

"There’s a growing worry that the economy may be running away from the Fed. While the thought of rapid change could be enough to scare investors now, we see higher inflation as a long-term positive for the market," said Lindsey Bell, chief investment strategist for Ally Invest.

"We’re still seeing historically low levels of inflation, so it would take a lot of change for inflation to get out of control," Bell added.

U.S. oil prices, meanwhile, jumped to the highest levels in more than a year, while Brent crude traded near $67 a barrel, as OPEC members looked to agree on extending their pact on production cuts into April.

OPEC members, along with allies such as Russia, were holding virtual meetings Thursday. Multiple reports suggested the cartel was prepared to roll over its current rate of output, which is holding back around 9.2 million barrels from the market each day, until at least the beginning of May.