TOKYO -- Asian shares were mostly lower Wednesday as investors fretted that the Federal Reserve might raise interest rates faster if pressure stays high on inflation.
Japan's benchmark Nikkei 225 edged up 0.5% to finish at 28,444.19. Australia's S&P/ASX 200 slipped 0.8% to 7,307.80. South Korea's Kospi dropped 1.3% to 2,430.93.
Chinese shares sank after officials in Beijing announced plans for a regulatory shakeup. Hong Kong's Hang Seng tumbled 2.6% to 20,005.12, while the Shanghai Composite shed 0.6% to 3,266.65.
Wall Street shuddered Tuesday after Fed Chairman Jerome Powell told lawmakers that the central bank would keep interest rates higher if need be to fight inflation.
“Asian shares were under pressure on Wednesday as global equities sold off after hawkish comments from Fed Chair Powell. He noted recent macro data, while possibly related to seasonal adjustments, suggest the Committee might have to raise rates higher than expected,” said Anderson Alves at ActivTrades.
A Fed meeting later this month is expected to result in another rate hike. When Powell speaks at U.S. Congress again later in the day, traders will watch to see if he reinforces the hawkish rhetoric or tones it down, given the market reaction.
Wall Street declined as angst over the Fed raised worries about a possible recession down the line. The S&P 500 dropped 1.5% for one of its worst days of the year so far, closing at 3,986.37. The Dow Jones Industrial Average lost 1.7% to 32,856.46, and the Nasdaq sank 1.3% to 11,530.33.
Inflation and what the Fed is doing about it have been at the center of Wall Street's sharp swings this year. After seeming to be on a steady decline since last summer, reports on inflation last month came in surprisingly hot. So did a suite of other data on the economy.
That raised fears that inflation is staying stickier than feared and that the Fed will have to raise rates higher than earlier thought. Higher rates can drag down inflation because they slow the economy, but they hurt prices for stocks and other investments. They also raise the risk of a recession later on.
Powell has confirmed some of those fears, saying the data mean “the ultimate level of interest rates is likely to be higher than previously anticipated.” He also said in his testimony to a Senate committee that the Fed is ready to increase the pace of its hikes again if needed.
That would be a sharp turnaround after it had just slowed its pace of increases to 0.25 percentage points last month from earlier hikes of 0.50 and 0.75 points.
“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.”
After sitting at virtually unchanged levels just before Powell's testimony, stocks fell immediately afterward.
“This is the market coming back to realistic expectations,” said Megan Horneman, chief investment officer at Verdence Capital Advisors. ”I think it’s going to continue to wash out some of the excesses in the market."
Wall Street has largely abandoned hopes that percolated early this year for a possible cut to interest rates later in 2023. It also upped its forecast for how high the Fed will ultimately take rates before pausing.
That’s been most clear in the bond market, where the yield on the 10-year Treasury topped 4% last week and hit its highest level since November. It helps set rates for mortgages and other important loans.
Early Wednesday it was at 4%.
The two-year Treasury yield, which moves more on expectations for the Fed, shot up to 5.01% from 4.87% and is at its highest level since 2007.
The U.S. government's monthly jobs report, due Friday, will provide an update on wages. The Fed's fear is that too-strong gains could push prices higher.
The challenge for the market has been that the economy has actually been too strong, despite all the rate increases the Fed has thrown at it. That suggests a recession may not be looming but also likely means rates will need to stay higher for longer, raising risks of a deeper recession down the line.
In energy trading, benchmark U.S. crude lost 10 cents to $77.48 a barrel in electronic trading on the New York Mercantile Exchange. Brent crude, the international standard, rose 6 cents to $83.35 a barrel.
In currency trading, the U.S. dollar rose to 137.72 Japanese yen from 137.07 yen. The euro cost $1.0537, down from $1.0551.
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AP Business Writer Stan Choe contributed.
