Shares are stabilizing for now after painful slumps

Wall Street shares were stable on Wednesday, a day after falling on one of the worst days of the year, but wider swings may be in store later in the day.

The Standard & Poor’s 500 was little changed during early trading. The Dow Jones industrial average fell 2 points, or less than 0.1%, to 32,858 at 9:35 a.m. ET, while the Nasdaq Composite was up 0.1%.

Stocks fell sharply the previous day after the Federal Reserve chief warned it could accelerate rate hikes if inflationary pressures remain elevated. Such increases can reduce inflation by slowing the economy, but they also affect the prices of stocks and other assets, increasing the risk of a future recession.

Fed Chairman Jerome Powell will address another House committee on Capitol Hill Wednesday morning. At the same time, a report will show how many jobs were advertised nationwide in January. Such data has come under close scrutiny on Wall Street, as it can provide clues as to where workers’ wages are headed.

Large wage increases are good for workers struggling with high inflation, but too much growth could create a vicious cycle that will only push inflation further up, the Fed fears. The number of jobs has become much more important on Wall Street because if it far exceeds the number of unemployed, employers may have to offer bigger pay raises, the reasoning goes.

A separate report on Wednesday morning suggested hiring across the economy was still much stronger than expected. Private employers added a net 242,000 workers to their payroll last month, according to the ADP. This was an acceleration from the appointment in January and more than expected.

It could provide a preview of what the US government’s broader report on corporate hiring will reveal. It’s due out Friday, and a large number for this report last month fueled Wall Street’s concerns that inflation may not cool down as quickly and smoothly as hoped.

In addition to last month’s landmark jobs report, other data showed surprising strength in everything from US consumer spending to inflation itself at various levels. As a result, equities fell and bond yields rose in February. It was a reversal of a rally earlier this year in hopes of further cooling of inflation and some rate cut by the Federal Reserve.

Instead, Wall Street got a turning point in the opposite direction it was hoping for. Powell said Tuesday that the strong data will likely mean interest rates will eventually have to rise higher than previously expected. He also said the Fed could speed up the pace of its rate hikes, a reversal after only scaling back the scope of its rate hikes last month.

Traders now widely expect the Fed to raise rates by 0.50 percentage point later this month. In the past month, it has fallen to 0.25 points from previous increases of 0.50 and 0.75 points.

Expectations of a more aggressive Fed were most evident in the bond market, where yields have surged in recent weeks. On Wednesday, they softened somewhat, giving the stock market some breathing space.

The yield on the 10-year Treasury bond, which helps set interest rates on mortgages and other large loans, fell to 3.91% from 3.97% late Tuesday.

Two-year government bond yields, which were more in line with expectations for the Fed, fell to 4.97% from 5.02% at the end of Tuesday. It is still close to the highest level since 2007.

But yields on shorter-term government bonds are still well above those on government bonds with maturities many years in the future. This is an unusual event that Wall Street sees as a fairly reliable signal of an approaching recession.

Based on where traders are betting on future returns, the market appears to be suggesting that inflation will continue to rise, the Fed will raise rates quickly and then gradually lower them, said Jonathan Golub, head of US Equities. Strategist at Credit Suisse. He also said the bond market appears to be a signal that a recession could begin in August 2025.

For now, the economy still looks resilient, despite the rate hikes the Fed has already implemented. The Fed’s overnight interest rate rose to a range of 4.50% to 4.75%, from near zero at the beginning of last year amid the fastest increase in increases in decades.

The question is how long a strong labor market and US consumer spending can support other distressed sectors of the economy, especially if the Fed keeps interest rates high, as it has warned.

AP wDrivers Yuri Kageyama and Matt Ott contributed to this report.