Stocks make back some of the post-Fed losses, Dow now down 150 points

U.S. stocks dropped to their session lows on Wednesday after the Federal Reserve raised its inflation expectations and moved up the time frame on when it will hike interest rates next.

The Dow Jones Industrial Average turned sharply lower to fall as much as 382 points and last traded 150 points lower. The S&P 500 fell 0.3% on the day after hitting an all-time high in the previous session. The tech-heavy Nasdaq Composite erased earlier gains and traded flat.

All 11 S&P 500 sectors fell into the red, led to the downside by tech, materials and consumer staples.

The policymaking Federal Open Market Committee indicated that rate hikes could come as soon as 2023, after signaling in March that it saw no increases until at least 2024.

“This is not what the market expected,” said James McCann, Aberdeen Standard Investments’ deputy chief economist. “The Fed is now signaling that rates will need to rise sooner and faster … This change in stance jars a little with the Fed’s recent claims that the recent spike in inflation is temporary.”

Major equity benchmark traded off their lows of the day after Chairman Jerome Powell said in a press conference that the so-called dot-plot projections should be taken with a “big grain of salt” and that the liftoff is “well into the future.”

The central bank gave no indication as to when it will begin cutting back on its aggressive bond-buying program. The Fed has been buying $120 billion worth of bonds each month as the economy continues to recover from the coronavirus pandemic.

The Fed chief said that the central bank with provide “advanced notice” before announcing their move to taper asset purchases.

“You can think of this meeting that we had as the ‘talking about talking about’ meeting,” Powell said. “In coming meetings, the committee will continue to assess the economy’s progress toward our goals. As we have said, we will provide advance notice before announcing any decision to make changes to our purchases.”

The Fed also raised its headline inflation expectation to 3.4% for 2021, a full percentage point higher than the March projection, but the post-meeting statement continued to say that inflation pressures are “transitory.”

The meeting came as inflation heats up, with producer prices rising at their fastest annual rate in nearly 11 years during May, a report on Tuesday showed.

Powell said inflation could run hotter than the Fed expected amid the economic recovery.

“As the reopening continues, shifts in demand can be large and rapid and bottlenecks, hiring difficulties and other constraints could continue to limit how quickly supply can adjust, raising the possibility that inflation could turn out to be higher and more persistent than we expect,” Powell said during the press conference.

Economic reopening plays provided the broader market with some support. Royal Caribbean and Carnival both climbed 2% after an upgrade from Wolfe Research.

On Wednesday, China said it will release industrial metals including copper, aluminum and zinc from its national reserves to curb commodity prices. Copper price has fallen more than 10% from its record high, dipping into correction territory on Tuesday.

— CNBC’s Jeff Cox contributed reporting.