U.S. stocks closed sharply lower on Tuesday as investors digested Fed Chair Jerome Powell’s hawkish comments that the central bank may need to continue with its steep rate hikes for a longer period than expected in order to control soaring inflation. Powell’s message ignited fears of a larger interest rate hike in the Fed’s next policy meeting. All three major indexes ended in negative territory.

How Did The Benchmarks Perform?

The Dow Jones Industrial Average (DJI) plummeted 1.7% or 574.98 points to close at 32,856.46 points.

The S&P 500 fell 1.5% or 62.05 points to finish at 3,986.37 points. Financial and real estate stocks were the worst performers.

The Financials Select Sector SPDR (XLF) lost 2.6%, while the Real Estate Select Sector SPDR (XLRE) declined 2.5%. The Materials Select Sector SPDR (XLB) lost 2%. All 11 sectors of the benchmark index ended in negative territory.

The tech-heavy Nasdaq slid 1.3% or 145 points to end at 11,530.33 points.

The fear-gauge CBOE Volatility Index (VIX) was up 5.44% to 19.66. Decliners outnumbered advancers on the NYSE by a 4.00-to-1 ratio. On Nasdaq, a 2.21-to-1 ratio favored declining issues. A total of 11.17 billion shares were traded on Tuesday, higher than the last 20-session average of 10.98 billion.

Powell’s Message Raises Worries

Trading had been volatile through last week and Monday saw stocks managing to end slightly higher as investors eagerly waited for Fed Chair Jerome Powell’s congressional testimony. Stocks straightaway took a hit on Tuesday as Powell’s hawkish message dented investors’ confidence.

“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 to the Senate Banking committee.

Powell’s message gave a clear hint at a steeper rate hike in the central bank’s next policy meeting as the struggle to bring down inflation continues. The Fed increased interest rates by a small 25 basis points in February after hiking rates by 50 basis points in February and four straight 75 basis point hikes prior to that.

The 25-basis points rate hike in February had raised hopes that the Fed may have started going slow on its tight monetary policy and could even halt hiking rates in the coming months. However, robust economic data released in February showed that inflation has been climbing once again.

Powell’s message on Tuesday further suggested the Fed will go for a steeper rate hike in its next policy meeting. Concerns are now growing that the central bank could now raise interest rates by another 50 basis points in its next meeting.

These fears dented investors’ confidence taking a toll on stocks. Tuesday’s massive selloff has now pushed the Dow into negative territory for the year. The blue-chip index is now trading down 0.9% this year. However, the S&P 500 and Nasdaq are up 3.8% and 10.2%, respectively.

As the major indexes took a hit, the 2-year Treasury yield soared to 5%, its highest level since 2007. Tech stocks felt the heat most with shares of Alphabet Inc. (GOOGL Quick QuoteGOOGL - Free Report) declining 1.3%. Also, Apple Inc. (AAPL Quick QuoteAAPL - Free Report) fell 1.5%. Apple has a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

However, financial stocks were the biggest sufferers. Bank of America Corporation (BAC Quick QuoteBAC - Free Report) lost 3.2%, while Citigroup Inc. (C Quick QuoteC - Free Report) gave up 2.1%.

Economic Data

Wholesale inventories declined 0.4% to $929 billion in January, its first decrease since mid-2020.

In other economic data released on Tuesday, consumer credit for January increased at a seasonally adjusted annual rate of 3.7%.