Dow drops 1,175 points as new Fed chair sworn in

Dow drops 1,175 points as new Fed chair sworn in

- in Business

The Dow Jones industrial average closed down 1,175 points, as the market bet on more interest rate hikes, the same day that a new Federal Reserve chairman was sworn in.

The Dow recovered after briefly dropping 1,500 points, the largest intraday drop in the index’s history, to break below the psychologically important level of 25,000.

But the overall pullback was only 4.6 percent, not record-setting on a percentage-wise basis. The S&P 500 would have to drop 7 percent or more to trigger a halt in trading, and it would have to drop 10 percent or more to be considered a “correction.”

Still the plunge had markets heading to their lowest close of the year, and it followed a dip on Friday, which itself was the sixth-largest point drop in the Dow’s history.

Monday’s selling spree also occurred the same day that Jerome Powell was sworn in as chairman of the Fed, which is in charge of setting the potentially higher interest rates that are driving the sell-off.

On Sunday the central bank’s departing leader sounded a note of caution on stock prices.

The Dow Jones industrial average

“It is a source of some concern that asset valuations are so high,” outgoing Fed chair Janet Yellen told CBS News on Sunday, highlighting price-earnings ratios in equities.

Now, as Powell takes the reins, he and the rest of the Fed Board of Governors will have to determine if that long-running trend is starting to reverse — and how to respond. The market continued its wild Friday dive into Monday with a roller-coaster ride that saw the Dow plunge 600 points by mid-afternoon.

“Everybody knew this was coming — stocks are close to record valuations and it was a matter of when it was going to happen, not if,” said Dan North, chief economist at Euler Hermes North America. “I would expect that at this point, it’s probably sentiment-driven and we’ll get a rebound,” he said.

Market observers debated whether this was reflective of a short-term breather for a meteorically rising market, or the harbinger of a more broad-based correction. The appearance of higher wage growth in Friday’s jobs report was good news from a Main Street economic growth standpoint, but it spooked Wall Street as investors pondered whether this would give the Fed more incentive to raise interest rates at a quicker pace.

Under Yellen, the Fed had set a course for three interest rate hikes in 2018. Economists debated whether this would be too much, or too little — a question with higher stakes in light of the market’s dramatic movements over the last two days.

Image: Tommy Kalikas works on the floor of the New York Stock Exchange

A trader works on the floor of the New York Stock Exchange on Monday.