Fed is ‘probably overdoing it’ in battle with inflation, warns of deflation signs

U.S. stocks plunged Tuesday, as investors worried the Fed will have to keep up its aggressive pace of monetary tightening to combat stubbornly high inflation. Many investors have feared the central bank risks triggering a recession should it raise interest rates too much too fast in its effort to bring soaring inflation under control. 

The Dow Jones Industrial Average DJIA, -3.94% tumbled 1,276 points, or 3.9%, on Tuesday, while the S&P 500 SPX, -4.32% sank 4.3% and the technology-heavy Nasdaq Composite COMP, -5.16% plunged 5.2%. All three major stock benchmarks suffered their biggest percentage drops since June 11, 2020, snapping their four-day winning streaks, according to Dow Jones Market Data.

Stocks sank after the U.S. Bureau of Labor Statistics reported Tuesday morning that inflation in August rose 0.1% for an annual rate of 8.3% based on the consumer price index. The reading on inflation, including core data stripping out food and energy prices, was stronger than expected.