Updated at 4:15 pm ET
Stocks extended declines Thursday, while the dollar tested fresh two-decade highs against its global peers, as investors unpacked a hawkish Federal Reserve rate hike and braced for the impact of policy tightening from major central banks around the world.
The Fed's decision to boost its benchmark Fed Funds rate by 75 basis points, to a range of 3% to 3.25%, was largely expected, but the signaling from Chairman Jerome Powell, as well as his suggestion that taming inflation is likely to induce recession, pushed stocks sharply lower by the close of trading Wednesday and carried the U.S. dollar to a fresh 20-year high against a basket of its global peers.
"Reducing inflation will likely require a sustained period of below-trend economic growth,” Powell told reporters in Washington. "No one knows whether this process will lead to a recession or, if so, how significant that recession would be."
The stark assessment, which included warnings about rising unemployment and further weakness in the housing market, was paired by a big move higher for 2-year Treasury note yields, which surged to as high as 4.152% in the wake of Powell's comments and into early New York trading.
The move now puts the spread over benchmark 10-year notes at around 55 basis points, indicating traders are pricing in an increased chance of near-term recession even as they see the Fed Funds rate rising by at least 1.25% this year and then to as high as 4.5% in early 2023.
"With short-term rates headed higher and the Fed explicitly prepared to accept a meaningfully higher unemployment rate, the yield curve will likely invert even more deeply, with the 2s-10s curve falling from an inversion of 50 basis points after the September Fed decision to 70 basis points during the coming winter," predicted Bill Adams, chief economist for Comerica Bank in Dallas.
The U.S. dollar index, meanwhile, neared a two-decade peak of 111.27 even following a move by the Bank of Japan to intervene in currency markets in order to strengthen the yen for the first time since 1998 following its decision to hold rates steady.
Masato Kanda, Japan's Vice Finance Minister For International Affairs, told reporters in Japan that the government took "decisive action" in the currency markets following a Bank of Japan policy decision that kept rates unchanged at their near-record lows.
The move triggered the biggest one-day decline for the dollar against the yen since March of 2020, to peg the pairing at 142.31.
The BoJ's move was followed by a rate hike from Norway's central bank, which boosted its key rate by 50 basis points to 2.25%, and a 75 basis point hike from the Swiss National Bank. The Bank of England also lifted its key Bank Rate by 50 basis points, to 2.25%.
Stocks in Europe were trending lower in mid-day trading following last night's sell-off on Wall Street, with the Stoxx 600 ended 1.8% lower in Frankfurt at a February 2021 low while the FTSE 100 fell 1.1% following the Bank of England decision in London.
Those moves followed a 1.05% decline for the MSCI ex-Japan index in Asia as stocks in China remain stuck at four-month lows on renewed growth concerns in the world's second-largest economy.
In the U.S., the S&P 500 finished down 0.84%, while the the Dow Jones Industrial Average fell 107 points, or 0.35%, to 30,076. The tech-focused Nasdaq lost 1.37%.
In terms of individual stocks, Target (TGT) shares fell 3.8% after it unveiled plans to hire as many as 100,000 temporary workers over the holiday season, while bringing forward its discount offerings, as it looks to capture market share from rival retailer Walmart (WMT) .
Lennar Corp. (LEN) shares rose 2% after the second-largest U.S. homebuilder posted stronger-than-expected third-quarter earnings powered in part by rising home prices.
Novavax Inc. (NVAX) tumbled 13.3% Thursday after analysts at JPMorgan lowered their rating and price target on the drugmaker following its decision to slash near-term sales forecasts.