By Hannah Erin Lang
Hopes for interest-rate cuts are growing even dimmer on Wall Street.
Stocks fell on Wednesday, after one wholesale inflation gauge came in hotter than expected and Federal Reserve Chair Jerome Powell highlighted the risks that higher energy prices will lift inflation.
Major indexes hit session lows following the central bank's widely expected decision to hold rates steady and pencil in one more cut for 2026. At a press conference, Powell told reporters that policymakers are in a " difficult situation."
With the Iran war sending energy prices sharply higher and threatening to stoke price pressures, analysts said the question is no longer when officials will cut rates, but whether they can credibly keep telling markets to expect a rate cut at all.
"Their hands are tied," said Michael O'Rourke, chief market strategist at JonesTrading. "I call it 'policy purgatory.'"
The Dow Jones industrials fell 1.6%, or 768 points, closing below its 200-day moving average for the first time since last summer. The S&P dropped 1.4%, while the Nasdaq composite slid 1.5%.
Consumer-discretionary companies such as auto website Carvana and Starbucks were among the biggest losers in the S&P 500, with the sector falling 2.3%. Consumer staples stocks also dropped, losing 2.4%.
Fears of a prolonged war with Iran have led investors to drastically scale back their expectations for rate cuts, which had helped boost stocks coming into the year, raising hopes that it would soon get easier for companies to invest and borrow money. On Wednesday afternoon, interest-rate futures showed a roughly 48% chance that the Federal Reserve doesn't cut rates at all in 2026, according to CME FedWatch. That's up from 4% before the conflict began.
"We had the tariff shock, we had the pandemic and now we have an energy shock of some size and duration," Powell told reporters. "You worry that's the kind of thing that can cause trouble for inflation expectations."
The Fed chair also noted that it was "frustrating" that services inflation, excluding housing, has remained stubbornly high. "We're not seeing progress there," he said.
U.S. government bond yields climbed, with the yield on the 2-year Treasury -- which often rises and falls with investors' expectations for short-term rates set by the Fed -- settling at 3.741%, according to Tradeweb, near its highs for the year. The yield on the 10-year note climbed to 4.256%.
Major indexes started falling early Wednesday, after the producer-price index report showed that wholesale inflation hit the highest rate in a year. That has added on to evidence that stubborn price pressures persisted in the economy, even before war in the Middle East jacked up the cost of oil, gas and other crucial imports.
A report released earlier this month also showed that the Fed's preferred inflation gauge, the personal-consumption expenditures price index, was still stuck above the central bank's target.
"There's a fear of what happens if inflation is higher than we want and trends back up," said Eric Gerster, chief investment officer at AlphaCore Wealth Advisory. "And we haven't even seen the impact of higher energy prices."
And the volatility in the energy markets has continued. Oil prices rose after a series of attacks on energy infrastructure in the Middle East: Israel struck the South Pars gas field, the world's largest such facility, and a ballistic missile fired by Iran hit Qatar's Ras Laffan Industrial City, which houses a major liquefied-natural-gas hub.
"Investors are worn down by getting whipsawed," O'Rourke said. "A lot of the narratives we started the year with have started to unwind."
Write to Hannah Erin Lang at hannaherin.lang@wsj.com
(END) Dow Jones Newswires
March 18, 2026 17:03 ET (21:03 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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