US stocks fell sharply on Tuesday after a dose of reality from Fed Chair Jerome Powell, who paved the way for a larger-than-expected rate hike at the central bank policy meeting later this month.
In remarks to the Senate Banking Committee on Tuesday morning, Powell said interest rate hikes are “likely to be higher than previously anticipated."
The news sent investors reeling, with all three major indexes dropping steeply.
Market expectations for a half-point rate hike spiked, shifting from a 30% probability to almost 70% by day's end, according to the CME FedWatch Tool.
Treasury yields soared and the 2-year reached its highest level since 2007. A key recession indicator was also triggered in Tuesday trading as the yield on the 2-year Treasury note fell below that of the 10-year Treasury note, a sign that investors are worried about the immediate economic future.
Powell continues his two-day testimony on Wednesday morning as he speaks before the House Financial Services Committee.
In other economic news, data from the Fed showed that even though consumers continued to spend in January, they took on significantly less debt than economists were expecting.
In corporate news, bank shares fell as investors worried that higher interest rates would lead to recession. JPMorgan Chase shares dropped by nearly 3%, Bank of America stock shed 3.2% and Wells Fargo fell 4.7%.
The Dow closed 575 points, or 1.7%, lower.
The S&P 500 was down 1.5%.
The Nasdaq Composite fell 1.3%.
As stocks settle after the trading day, levels might still change slightly.