Stocks plunged on Thursday, erasing gains from their best day since 2020 in a swing that underscores heightened anxiety on Wall Street about what the Federal Reserve’s campaign to curb inflation will mean for the economy.

The S&P 500 fell 3.6%, after jumping 3% on Wednesday. The Nasdaq composite slid 5%, its biggest drop since June 2020.

Volatility also manifested itself in other financial markets. Yields on government bonds soared, with the rate on 10-year U.S. Treasuries, a benchmark for borrowing costs across the economy, rising above 3% and hitting an all-time high since 2018, reversing a decline on Wednesday.

The stock market fluctuations, which have become more dramatic than usual, show that the debate on the fate of the economy is far from settled. Investors fear that the combination of rising prices and rising interest rates will hurt consumer spending, corporate earnings and economic growth. Between bouts of panic, glimmers of good news like upbeat corporate earnings reports or reassuring economic data have led to big rallies.

“The highly uncertain economic, inflation and interest rate outlook is leading to more frequent and large swings in investor sentiment in equity and bond markets,” said Kathy Bostjancic, chief U.S. financial economist at Oxford. Economics.

Stocks soared on Wednesday after Fed Chairman Jerome H. Powell assured investors at a press conference that policymakers were not considering extraordinarily large increases in interest rates – ruling out specifically a jump of 0.75 percentage points that some analysts had begun to predict. The Fed raised its key rate by half a percentage point, but this increase was widely expected.

Thursday’s decline erased that gain, but stocks were still slightly higher for the week and slightly above their low for the year, reached last Friday.

Still, Thursday’s cut was an acknowledgment from investors that while the Fed may not go so far as to raise interest rates by three-quarters of a percent in one day, it is quickly withdrawing support. to the economy. The central bank also plans to cut its bond holdings by nearly $9 trillion, a move that could directly affect financial markets.

The Fed is aiming to rein in demand and cool price gains that are now at their highest level in more than four decades after initially calling inflation a “transitional” result of the economy reopening after a year of slack. blockages and restrictions. The Fed’s change in tone has caused investors to rethink their appetite for risky investments, such as stocks.

“Investors have seen the Fed move from its theory that inflation will be transitory to a significant concern about its potential duration and impact on the economy,” said Scott Knapp, chief market strategist at CUNA Mutual. Group.

The Fed has acknowledged that some of the factors driving the price hike are beyond its control, namely Russia’s invasion of Ukraine, which drove up energy prices, and the recent lockdown of Covid by China, which could further disrupt an already unstable supply chain. Mr Powell said on Wednesday it would be difficult to bring inflation down without causing a recession – what economists call a “soft landing”.

“I expect it to be very difficult; it’s not going to be easy,” Powell said, though he expressed optimism about the Fed’s ability to pull this off.

“The Fed’s confidence in a soft landing and its commitment not to exceed a 50 basis point rate hike were not enough to offset the sad reality that a rapid tightening cycle is generally a difficult environment for stocks,” said Lindsey Bell, chief financial officer and market strategist at Ally Financial. “The path of inflation remains uncertain.”

Many companies have blamed rising prices on rising labor costs, and economists fear high inflation could become more permanent if wages continue to rise rapidly. New data released on Thursday showed just how much those costs are rising, with lower productivity and higher compensation leading to an 11.6% increase in unit labor costs, or how much a business spends on labor. labor for every item it produces, the Labor Department reported.

“Today’s data was startling and highly inflationary, suggesting that the good intentions communicated yesterday are unlikely to materialize,” Knapp said.

But investors are also set to get two more widely followed updates on the economy. The Labor Department will release its monthly hiring report on Friday, and economists polled by Bloomberg expect it to say 380,000 jobs were added last month, a slight deceleration from March but still a good performance for the economy.

The government will also release its latest consumer price index update next Wednesday. In the year to March, this measure of inflation rose 8.5%, its fastest pace since 1981.

Changing economic data and expectations are fueling larger swings in stock prices than investors have seen since 2020, a year in which the coronavirus pandemic and US presidential election rattled financial markets . So far this year, the S&P 500 has gained or lost more than 2.5% on seven different days, all in March, April and May. In 2021, there was only one day when stocks rose or fell that much, at the end of January of that year.

The bond market, too, saw prices soar. Yields on 10-year bonds have risen from around 1.6% at the start of the year to over 3% now, but not without steep declines over time.

All of this reflects the degree of uncertainty among investors about what will happen next, said Ms Bostjancic of Oxford Economics.

The main question, she said, is: “Will the Fed inadvertently stage a hard landing or will it manage to bring about the coveted soft landing?”