Powell’s comments spark fears on Wall Street of higher rates for longer

US stocks sharply sold off on Tuesday following the comments by Fed Chair Jerome Powell who suggested that rates may need to go higher for longer, fueling fears of a potentially larger rate hike at the central bank’s March policy meeting.

The Dow Jones Industrial Average was last down 402 points, or 1.2%, while the S&P 500 traded about 1.1% lower. The Nasdaq Composite dropped 0.8%.

“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” Powell said in remarks prepared for two appearances this week on Capitol Hill. “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”

The comments seemed to suggest that the Fed may implement a larger rate hike than last month’s 25 basis point increase at its next policy meeting on March 21-22.

At the same time, Powell’s remarks could mean that the peak rate for federal funds, also called the terminal rate, will likely go higher than previously expected, despite investor hopes that the Fed might have stopped hiking soon.

Powell’s comments were not surprising, but they act as a tough reminder for markets after such a brisk rally. Powell’s statements are also a reminder to investors that inflation isn’t done.

The Fed’s top priority is getting inflation down, and for good reason. People are starting to factor in persistently higher inflation, which could be the worst-case scenario for long-term investors and run the risk of prices spiraling higher.