Dow falls nearly 700 points after inflation report reduces chance of massive rate cut

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CNN
—

The consumer price index released on Wednesday was the last hope for investors who were calling for a half-percentage point cut in the key interest rate at the US Federal Reserve meeting next week.

This hope has now almost been dashed, and share prices are faltering as a result.

Hours after the release of the August CPI report, which showed the annual pace of price increases had cooled to 2.5%, the lowest since February 2021, the Dow plunged as much as 700 points, or 1.7%. The S&P 500 lost 1.5% and the Nasdaq Composite lost 1%.

CNN's Fear and Greed Index, which measures seven barometers of market sentiment, moved even further into the “fear” range.

On a monthly basis, prices rose by 0.2 percent, remaining unchanged from July.

But what attracted much more attention was the 0.3% rise in the core CPI index, which excludes food and energy, beating economists' expectations for a 0.2% rise. Fed officials pay close attention to core inflation numbers because they can provide more clarity on where prices are headed in the long term.

The larger-than-expected rise in core inflation will likely prompt central bankers to be more cautious in deciding whether and to what extent to cut interest rates.

On Tuesday, traders were pricing in a 34% chance that the Fed would cut rates by half a percentage point. But after the release of consumer price index data on Wednesday morning, they were pricing in a 15% chance that would actually happen. They are now pricing in an 85% chance of a quarter-percentage-point cut this month, and at the November meeting, the probability of a quarter-percentage-point cut is higher than the probability of a half-percentage-point cut.

Investors generally prefer lower interest rates because they allow companies to borrow money more cheaply, which often leads to higher profitability.

Wednesday's market moves are in stark contrast to Monday's, when the Dow, S&P 500 and Nasdaq all closed 1.2 percent higher. Big market swings like this are far from unusual in September, which has historically been a volatile month for stocks.

This story is evolving and will be updated.