Wall Street got a reality check as Jerome Powell’s hawkish rhetoric prompted a shift higher in Federal Reserve rate wagers, reviving recession fears and crushing the riskier corners of the market.

During a Senate testimony, the Fed’s boss signaled officials are ready to speed up the pace of tightening and take rates to higher levels should inflation keep running hot. Equities saw an abrupt slide, with the S&P 500 back below 4,000. The swap market showed a half-point hike in March as more likely than a quarter-point move, with the projected peak now hovering near 5.6 per cent — a recalibration that was cited in a note from market veteran Peter Boockvar entitled “A time for Advil and a check on the fed funds futures.”

Another worrisome development was that the U.S. 2-year yield exceeded the 10-year one by a full percentage point on Tuesday for the first time since 1981. Situations in which shorter-term rates are higher than those at the longer end are referred to as curve inversions — and are often seen as potential harbingers of a recession. The dollar climbed 1 per cent, sinking commodity prices, with oil tumbling the most since early January.

“Powell just said the quiet part out loud,” said Callie Cox at eToro. “The economy is performing impressively well, but that could complicate the Fed’s efforts to bring inflation down. Therefore, the Fed could accelerate rate hikes and hike more than expected to bring inflation down. This isn’t surprising news, but it’s a tough reminder for markets after such a brisk rally.”

The sharp advance in stocks from the October lows has indeed been supported by “hope over reality,” according to John Lynch at Comerica Wealth Management, who added that the outlook for a “higher for longer” Fed policy rate should be taken seriously by the markets.

To Fawad Razaqzada at City Index and Forex.com, Powell sounded more hawkish than some had envisaged, reviving “fears over a potential hard landing” given the monetary policy transmission lag.

Some economists also took Powell’s remarks as a sign that the Fed is more likely to take a bigger move at the March 21-22 meeting, though several market watchers are still expecting the central bank to roll out a more incremental 25 basis-point hike. Policymakers will have a chance to review the February jobs data and an update on consumer prices before they meet again.

“I do not think the Fed goes 50 bps at any of the remaining rate hike meetings at this point after already slowing the pace and will continue on with 25 bps until it finally stops,” said Boockvar.

The next few economic reports could be “make-or-break” numbers as they could shape the Fed’s economic projections at its next policy meeting, according to David Russell at TradeStation.

 “We underscore that even though we think 50 in March is not odds-on, we still view Powell’s delayed marking to market of the Fed posture in response to recent data as materially risk off,” said Krishna Guha at Evercore.

U.S. payroll growth has topped estimates for 10 straight months in the longest streak in decades, a trend that, if extended, will boost pressure on the Fed to keep raising interest rates. Beginning in April last year, the median forecast in each survey of economists fell short of the government’s initial estimate of payrolls by an average of 100,000 a month — the most in data compiled by Bloomberg back to 1998. 

Ahead of the February jobs report on Friday, the projection is for a 224,000 increase, which would be about half the pace seen in January.

Billionaire Ken Griffin said the setup for a U.S. recession is unfolding, with the Fed needing to raise interest rates further after Americans were stung with “traumatic” levels of inflation. The founder of Citadel and Citadel Securities said the central bank is limited in how much it can fight inflation with interest-rate increases, likening the tool to “having surgery with a dull knife.”

Goldman Sachs Group Inc. Chief Executive Officer David Solomon said there’s a “meaningfully higher” chance of a soft landing for the economy now than there was six months ago, echoing the sentiments of his peers that the U.S. could avoid a serious downturn. His comments came before Powell’s testimony.

Key events this week:

• Euro area GDP, Wednesday
• U.S. MBA mortgage applications, ADP employment change, trade balance, JOLTS job openings, Wednesday
• Fed Chair Powell’s semiannual Monetary Policy Report to the House Financial Services Committee, Wednesday
• Canada rate decision, Wednesday
• EIA crude oil inventories, Wednesday
• China CPI, PPI, Thursday
• U.S. Challenger job cuts, initial jobless claims, household change in net worth, Thursday
• Bank of Japan policy rate decision, Friday
• U.S. nonfarm payrolls, unemployment rate, monthly budget statement, Friday

Some of the main moves in markets :

Stocks

• The S&P 500 fell 1.5 per cent as of 4 p.m. New York time
• The Nasdaq 100 fell 1.2 per cent
• The Dow Jones Industrial Average fell 1.7 per cent
• The MSCI World index fell 1.5 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 1 per cent
• The euro fell 1.2 per cent to US$1.0551
• The British pound fell 1.6 per cent to US$1.1829
• The Japanese yen fell 0.9 per cent to 137.15 per dollar

Cryptocurrencies

• Bitcoin fell 1.6 per cent to US$22,048.83
• Ether fell 1.2 per cent to US$1,548

Bonds

• The yield on 10-year Treasuries advanced two basis points to 3.97 per cent
• Germany’s 10-year yield declined six basis points to 2.69 per cent
• Britain’s 10-year yield declined four basis points to 3.82 per cent

Commodities

• West Texas Intermediate crude fell 3.8 per cent to US$77.41 a barrel
• Gold futures fell 1.9 per cent to US$1,818.90 an ounce