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US stocks slump; S&P 500 has its worst week since February

It’s an acknowledgment that a rebounding economy with near-record prices for homes and stocks may not need super low rates much longer.
In this photo provided by the New York Stock Exchange, trader Ashley Lara works on the trading floor on June 11. Stocks were broadly lower Friday after a Federal Reserve official said that the nation's central bank might need to raise interest rates as early as next year, sooner than the Fed's latest estimate of possible rate increases in 2023.
In this photo provided by the New York Stock Exchange, trader Ashley Lara works on the trading floor on June 11. Stocks were broadly lower Friday after a Federal Reserve official said that the nation's central bank might need to raise interest rates as early as next year, sooner than the Fed's latest estimate of possible rate increases in 2023. [ NICOLE PEREIRA | AP ]
Published Jun. 18
Updated Jun. 18

NEW YORK — Stocks fell broadly on Wall Street Friday, sending the S&P 500 to its worst weekly loss since February. The index fell 1.3 percent and gave back 1.9 percent over the course of the week.

Banks and other stocks that soared earlier this year on expectations for the economy and inflation were among the biggest losers. Investors are still recalibrating their moves after the Federal Reserve’s signal this week that it may raise rates sooner than expected. Short-term Treasury yields continued to spurt higher, and the Dow Jones Industrial Average had its worst weekly loss since October.

Policymakers indicated they may raise short-term rates twice by late 2023, and they also began talks about slowing the bond-buying program that’s keeping longer-term rates low. On Friday, St. Louis Federal Reserve President James Bullard said on CNBC his personal prediction was that the first rate increase may come as soon as next year.

It’s an acknowledgment that a rebounding economy with near-record prices for homes and stocks may not need super low rates much longer. A recent burst of inflation may also be upping the pressure. But any pullback in Fed support would be a big change for markets, which have been feasting on ultra-low rates for more than a year. It marked a “U-turn on Easy Street,” as strategists at BofA Global Research described it.

That’s hurt stocks of banks, oil producers and other companies whose profits are closely tied to the strength of the economy in particular. On the other side, stocks of companies able to grow almost regardless of the economy’s fortunes have held up better.

A measure of nervousness in the stock market, known as the VIX, rose Friday but is only back to where it was about a month ago.

Banks are taking a hit from the shrinking gap between shorter- and longer-term interest rates, which helped send financial stocks in the S&P 500 down 2.2 percent on Friday. That was the sharpest loss among the 11 sectors that make up the index.

When the gap is wide, the industry can make big profits from borrowing cash in short-term markets and lending it out at longer-term rates. But short-term yields jumped sharply this week after the Fed’s indication that it may be moving up the timeline for rate increases. The two-year Treasury yield rose to 0.25 percent Friday from 0.23 percent a day before and from 0.16 percent a week before.

The quickly recovering economy and some supply shortages have helped send prices soaring across the economy recently, from lumber to airline tickets to used cars. The Fed has said it expects high inflation to be only “transitory,” and prices for lumber at least have already started to moderate a bit. Much of Wall Street also say inflation looks to be only temporary, but part of the Fed’s mission is to keep prices under control.

“You just don’t have the firms able to build capacity to meet demand,” said Ken Johnson, investment strategy analyst at Wells Fargo Investment Institute. “Investors are nervous about that.”

The first action the Fed is likely to take would be a slowdown in its $120 billion of monthly bond purchases, which are helping to keep mortgages cheap, but the Fed’s chair said such a tapering is still likely “a ways away.”

Besides keeping inflation steady, the Fed’s other main job is to keep the job market healthy. Employment has been improving, but growth has slowed in recent months.

“That gives investors some reassurance that the Fed isn’t going to move on rates when the economy, from a labor market perspective, isn’t back to where it was,” Johnson said.

By DAMIAN J. TROISE and STAN CHOE, AP Business Writers