Wall Street’s dizzying swings continued for a second day on Tuesday, again driven by uncertainty about what the Federal Reserve might reveal on Wednesday after its first policy-setting meeting of the year.
Though the trading was not as dramatic as on Monday, when stocks fell 4 percent before ending with a gain, the push-and-pull between buyers and sellers was evident: The S&P 500 fell nearly 3 percent at its lowest point on Tuesday before recouping most of those losses.
By the close of trading, the index was down about 1.2 percent. The Nasdaq composite ended the day 2.3 percent lower.
The volatile trading comes with the S&P 500 hovering above a drop of 10 percent from its January high, a marker known as a correction that signifies the market’s swiftly changing attitude about prospects for stocks in the immediate future.
Investors are focused on the Fed’s next move as the central bank focuses on slowing inflation by pulling back on its support for the economy. The central bank has already said it soon will stop buying government bonds, and investors expect it to start raising interest rates in March.
But stock investors are agonizing over what the central bank might say on Wednesday as it concludes the two-day meeting, and that has led to the big swings in prices this week.
“The market has been behaving incoherently, not knowing whether to go down because the Fed is tightening or go up because the Fed is actually taking action to rein in inflation, ” said Anu Gaggar, a strategist for Commonwealth Financial Network. “That’s why tomorrow’s Fed meeting is important. It will provide some much-needed clarity on where the Fed officials’ heads are.”
The worry, which several analysts see as overblown, is that the Fed will decide it is starting its inflation fight too late and will move more aggressively than investors anticipate. It’s a concern that belies efforts by the Fed chair, Jerome H. Powell, to signal upcoming changes well in advance of making them so as not to surprise markets.
No matter, there’s no question that investors have become unsettled by the idea that interest rates are going to rise this year. Higher interest rates can slow the economy, making borrowing for houses, cars and business costs more expensive. Higher rates also discourage investors from bidding up risky assets like stocks.
Part of Wall Street’s concern is that the Fed has room to be aggressive in its fight against inflation because the Omicron variant of the coronavirus is by some measures less severe than previous forms. Minutes from the central bank’s December meeting, which it published early in January, also showed that the Fed had discussed moving with more urgency.
Stocks have tumbled all month long, falling most days since hitting a peak on Jan 3. Stocks have climbed only five out of 16 trading days in January, and the S&P 500 is now down 9.2 percent from its high.
“This sell-off almost smacks of fears that this will lead to a recession, but the Fed hasn’t even started to tighten,” said Edward Yardeni, an economist. “There is an overreaction here.”
That’s not to say there aren’t serious risks facing investors and the economy. Prices rose at their fastest pace in 40 years in December, in part because of disruptions that are slowing output at factories. On Tuesday, the International Monetary Fund reduced its estimate for global growth to 4.4 percent from the 4.9 percent it projected just three months ago.
The I.M.F. still expects the U.S. economy to grow 4 percent this year, but that’s slower than in 2021. The fund said the failure of the Biden administration’s sweeping $2.2 trillion infrastructure and social policy package and the Fed’s tighter monetary policy were among the reasons it reduced the growth forecast for the United States.
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