Inflation casts pall over economy as wary investors await Fed action

U.S. stocks tumbled Monday as investors reeled from a lousy inflation report and worried that Federal Reserve actions would lead to a recession, creating new headaches for President Biden as the country sinks deeper into economic doldrums.

The Dow Jones Industrial Average slumped 876 points, or 2.79%, and the S&P 500 fell into bear market territory, meaning it has dropped 20% from its recent high. Bear markets are viewed as a telltale sign of investors’ pessimism about the economy.

The Nasdaq also fell sharply, by 4.68%, as tech shares continued to slump.

The White House said it is monitoring the sell-offs but pointed to the global nature of the upheaval and insisted the U.S. economy can withstand various shocks — regardless of the roller-coaster on Wall Street — and that supply chains will improve over time.

“We know families’ concerns about inflation and the stock market. We face global challenges. We’re not the only country dealing with what we’re seeing at the moment as it relates to inflation,” said White House press secretary Karine Jean-Pierre. “The way that we see this is the American people are well-positioned to face these challenges because of the economic, historic gains that we have made under this president in the last 16 months.”

Cryptocurrencies continued their free fall, and overseas markets took a downward turn. Japan’s Nikkei closed down 3%, and the yen fell to its lowest level in 20 years. Tokyo suggested it will step in to reverse the trend.

China’s “zero-COVID” policies of recurring lockdowns have taken an economic toll. In Europe, the Stoxx Index closed down 2.4% to its lowest point since early 2021.

The United Kingdom reported that its economy shrank in April by 0.3% instead of expanding as predicted.

Declining fortunes on Wall Street and elsewhere prompted “Black Monday” to trend on Twitter. The term refers to the day in October 1987 when the Dow lost almost 22% in a single day.

Investors are responding to “growing concerns the Fed is behind the inflation curve, and that the economy is entering a period of stagflation,” Nasdaq writers said in an online post.

Tumult on Wall Street is mixing with soaring prices of gas, food and other goods to create a somber economic mood. The University of Michigan’s Consumer Sentiment Index fell to a record low 50.2 in June, down from 58.4 in May.

“Consumer sentiment declined by 14% from May, continuing a downward trend over the last year and reaching its lowest recorded value, comparable to the trough reached in the middle of the 1980 recession,” survey Director Joanne Hsu said.

Inflation hit a 40-year high in May, according to a worse-than-anticipated Labor Department report on Friday, fanning worries about the broader economy.

Federal Reserve Chair Jerome Powell will set the tone for the markets Wednesday by outlining plans for interest rate hikes in the summer and fall. The central bank has signaled it may raise rates by half a percentage point this week in a bid to corral inflation, triggering fears that the bank will set off a recession as housing markets, business investment and overall spending cool.

Some economists hope the Fed can navigate a soft landing in which the bank manages inflation without sparking a recession.

Yet former Treasury Secretary Lawrence H. Summers said over the weekend that the combination of high inflation and low unemployment is “always followed within two years by recession.”

“I think the optimists were wrong a year ago in saying we have no inflation, and I think they are wrong now if anyone is highly confident that we are going to avoid recession,” he told CNN’s “State of the Union.”

Steve Hanke, a professor of applied economics at the Johns Hopkins University in Baltimore, said the Fed did not pay close enough attention to the growth rate in the money supply, resulting in high inflation. He sees a 65% to 75% chance of a recession as the Fed moves to ease inflation.

“The Fed-created inflation and sanctions imposed by the U.S. and its allies in their undeclared war against Russia are a one-two killer punch,” he said.

Economic whirlwinds have been a major drag on Mr. Biden’s first term.

The White House insists it is making headway against the global problem, but critics say the administration ignored warning signs and overheated the economy with stimulus funding in early 2021.

The White House dismissed those concerns Monday and said Mr. Biden and congressional Democrats had no choice but to prop up the economy.

“That is not how we’re seeing the American Rescue Plan,” Ms. Jean-Pierre said. “When he walked into this administration, the economy was at a standstill.”

The White House declined to say whether Mr. Biden will waive certain tariffs on China to increase supply and ease inflation, and it refused to handicap what the Fed planned to do at its Wednesday session.

“The Federal Reserve needs to have their independence. [Mr. Biden] wants to give them their space to make their own decision,” Ms. Jean-Pierre said.

Some economic trends are impacting Americans right now. The national average retail price for a gallon of gasoline reached $5 for the first time on Saturday, according to AAA figures.

The new average marks a $1.93 rise per gallon over the past year. Prices rose by 19 cents over just the previous week.

Drivers in some parts of the country are paying far more than the average. The average cost per gallon for Californians is $6.43, according to AAA.

The skyrocketing prices coincide with higher fuel demand as Americans hit the road over the summer. Consumers appear to be swallowing the higher prices, at least for now.

“Gasoline demand, while rising seasonally, is still well below previous records, but remains impressive with prices in all states at record levels. Should the rise in price finally start to slow demand’s rise, we could see some breathing room, but for now, it seems like Americans are proving resilient to record highs,” Patrick De Haan, head of petroleum analysis at GasBuddy, said in a Monday newsletter.

He said the upward momentum of gas prices “may slow down, but we are still just one potential jolt to supply away from heading even higher.”

The White House has repeatedly blamed Russian President Vladimir Putin for high gas prices as the West cuts off Russian supply, and Mr. Biden recently urged large fossil fuel companies to do more drilling under existing leases.

“Oil companies need to do their parts as well,” Ms. Jean-Pierre said.

• Seth McLaughlin contributed to this report.