The inflation fight is not over.

The stock market crumbled beneath the weight of “Fed speak” on Tuesday and more potentially negative economic news is on the schedule for the rest of the week.

How traders deal with this whipsaw stock market hinges on a variety of moving parts, headlined by another central bank speaking event.

Fed Speech Before Congress Sends Market Reeling

Nervous anticipation to start the stock market session today was followed by a harsh sell-off across the board.

All three major indexes fell hard on the day.

The Dow topped all losses on the session, closing at 32,856.46 points to crumble by 1.72% (dropping 574.98 points on the day). The Nasdaq dropped to 11,530.33 points for a 1.25% tumble while the S&P 500 lost 1.53% to 3,986.37 points.

Heavy selling began just after Federal Reserve (Fed) Chairman Jerome Powell opened his testimony this morning for his Semiannual Monetary Policy Report to the Congress.

He didn’t wait to get right to the point in his opening remarks.

“My colleagues and I are acutely aware that high inflation is causing significant hardship, and we are strongly committed to returning inflation to our 2 percent goal,” Powell stated before the Senate Banking Committee. “Over the past year, we have taken forceful actions to tighten the stance of monetary policy.”

“We have covered a lot of ground, and the full effects of our tightening so far are yet to be felt,” Powell continued. “Even so, we have more work to do.

By midday the Dow was already down by more than 400 points and the major indexes never recovered on the day.

More, higher interest rates possible from Fed

How much more tightening will there be from the Federal Reserve?

The most recent .25% – or 25 basis points – increase was the eighth increase since March, 2022. This boosted the federal funds rate within the target range of 4.5%-4.75% and the Fed goal is to get core inflation down to 2%.

When the Fed raises rates or officials “Fed speak” about higher rates, the stock market reacts. Tuesday was no different after Powell’s remarks stating the Fed commitment to fighting inflation.

“Although inflation has been moderating in recent months, the process of getting inflation back down to 2 percent has a long way to go and is likely to be bumpy,” Powell said. “As I mentioned, 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.”

The central banker is considering higher and possibly more interest rate hikes.

“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,” Powell said. “Restoring price stability will likely require that we maintain a restrictive stance of monetary policy for some time.”

Core inflation key target of central bankers

Powell reiterated the central bank commitment to lowering core inflation.

“From a broader perspective, inflation has moderated somewhat since the middle of last year but remains well above the FOMC’s longer-run objective of 2 percent,” Powell said. “Over the past 12 months, core PCE inflation, which excludes the volatile food and energy prices, was 4.7 percent.”

The central banker isn’t seeing the level of results expected to this point.

“There is little sign of disinflation thus far in the category of core services excluding housing, which accounts for more than half of core consumer expenditures,” Powell said. “To restore price stability, we will need to see lower inflation in this sector, and there will very likely be some softening in labor market conditions.”

Job growth is a heightened focus for the Fed at this point in its monetary policy actions.

“Despite the slowdown in growth, the labor market remains extremely tight,” Powell said. “The unemployment rate was 3.4 percent in January, its lowest level since 1969. Job gains remained very strong in January, while the supply of labor has continued to lag.”

That has contributed to the Fed focus on increasing interest rates.

“We continue to anticipate that ongoing increases in the target range for the federal funds rate will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time,” Powell said. “In addition, we are continuing the process of significantly reducing the size of our balance sheet.”

Every Fed tool in play to fight high inflation

Fed officials are prepared to use all tools necessary to bring down inflation that remains near 40-year highs.

“Our overarching focus is using our tools to bring inflation back down to our 2 percent goal and to keep longer-term inflation expectations well anchored,” Powell said. “Restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the longer run.”

Powell restated the hawkish Fed monetary policy in play.

“The historical record cautions strongly against prematurely loosening policy,” Powell said. “We will stay the course until the job is done.”

Traders watching for more negative economic news

Traders need to keep alert about what is still ahead this week.

Powell’s statements Tuesday will be followed by more testimony in the U.S. House on Wednesday. His testimony Wednesday is sandwiched between the Automatic Data Processing (ADP) national employment report and the Job Openings and Labor Turnover Survey (JOLTS), both for February. Traders are also watching the nonfarm payroll report set for release on Friday.

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