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Central banks raise interest rates: Stocks fell sharply worldwide Friday on worries an already slowing global economy could fall into recession

WASHINGTON — Global stocks sank dramatically on Friday due to concerns that a global economy that is already faltering could enter a recession as central banks continue to raise interest rates.

The Dow Jones Industrial Average closed at its lowest level since late 2020, down 1.6%. The S&P 500 lost 1.7%, approaching its mid-June 2022 low, while the Nasdaq fell 1.8%.

The selling completed another another difficult week on Wall Street, leaving the major indexes with their fifth consecutive weekly drop in the past six weeks.

As speculators concerned about a possible economic downturn, energy prices ended significantly lower. Treasury yields, which influence mortgage and other borrowing rates, remained at multiyear highs.

As a result of preliminary statistics indicating that corporate activity experienced its greatest monthly decline since the beginning of 2021, European markets fell as much as or more than their American counterparts. A fresh plan unveiled in London to reduce taxes added to the pressure, sending U.K. yields skyrocketing since it could ultimately push the central bank to hike rates even more sharply.

This week, the Federal Reserve and other central banks across the world aggressively increased interest rates in an effort to combat excessive inflation, with further substantial hikes expected in the future. Deliberately putting the brakes on economies in the hopes that decreased family and business spending will reduce inflationary pressures. However, they also pose a hazard to the economy if they increase too quickly or too far.

In addition to Friday’s disappointing news on European business activity, a separate study indicated that U.S. economic activity is still declining, albeit not as drastically as in previous months.

Douglas Porter, chief economist at BMO Capital Markets, noted in a research report, “Financial markets are now fully digesting the Fed’s tough message that there would be no retreat from the inflation struggle.”

On concerns that a weakening global economy may reduce gasoline use, U.S. crude oil prices dropped 5.7% to their lowest level since the beginning of the year. Higher interest rates typically have the greatest impact on assets that appear to be the most expensive or the most hazardous.

Even gold plummeted in the global sell-off, as higher-yielding bonds made no-interest investments appear less enticing. In the meantime, the U.S. dollar has risen considerably against other currencies. This can have a negative impact on the earnings of U.S. corporations with extensive abroad operations, as well as impose a financial strain on much of the developing world.

The S&P 500 dropped 64.76 points to 3,693.23, marking its fourth consecutive decline. The Dow, which at one point was down more than 800 points, decreased by 486.27 points to settle at 29,590.40. The Nasdaq index dropped 198.88 points to 10,867.93.

Stocks of smaller companies fared significantly worse. The Russell 2000 closed at 1,679.59, down 42.72 points, or 2.5%.

More than 85 percent of S&P 500 equities ended the day in the red, with technology companies, retailers, and banks comprising the largest weights on the index.

Wednesday, the Federal Reserve raised its benchmark rate, which impacts numerous consumer and commercial loans, to a range of 3.00 to 3.25 percent. It was close to zero at the beginning of the year. The Fed also provided a projection indicating that its benchmark rate might reach 4.4% by the end of the year, a whole point more than what was anticipated in June.

Treasury yields have reached multi-year highs as interest rates have increased. The yield on the 2-year Treasury note, which tends to track expectations for Federal Reserve action, increased from 4.12% late Thursday to 4.20 percent on Friday. It has not been at this level since 2007. The yield on the 10-year Treasury note, which affects mortgage rates, decreased to 3.69 percent from 3.79 percent.

According to Goldman Sachs’s strategists, the majority of their clients now anticipate a “hard landing” that will precipitously depress the economy. The only concern for them is the timing, severity, and duration of a potential recession.

Higher interest rates are detrimental to all types of investments, but equities could remain stable if corporate profits continue to expand strongly. As a result of rising interest rates and concerns about an impending recession, many analysts are reducing their earnings projections for the upcoming year.

“Increasingly, market psychology has shifted from inflation fears to concerns that, at the very least, corporate earnings will drop as economic growth slows demand,” said Quincy Krosby, chief global strategist at LPL Financial.

The U.S. labor market has remained impressively robust, and many economists believe the economy expanded over the summer quarter after contracting during the first half of the year. However, the positive indicators signal that the Fed may need to increase interest rates much more to achieve the necessary cooling to reduce inflation.

Several vital sectors of the economy are already in decline. Mortgage rates have reached 14-year highs, resulting in a 20% decline in existing house sales over the past year. But other sectors that thrive when interest rates are low are also suffering.

As a result of Russia’s invasion of Ukraine, Europe’s already vulnerable economy is struggling with the ramifications of war on its eastern front. The European Central Bank is increasing its key interest rate to combat inflation, despite the fact that the region’s economy is forecast to enter a recession in the near future. And in Asia, China’s economy is grappling with still-strict COVID infection control regulations that harm enterprises.

Few on Wall Street believed Friday’s economic figures were sufficient to convince the Fed and other central banks to modify their position on rate hikes. Therefore, they have only increased the concern that interest rates would continue to rise despite the fact that economies are already declining.

This report was authored by Economics Writer Christopher Rugaber and Business Writers Joe McDonald and Matt Ott.

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