U.S. stocks drifted lower after swinging between gains and losses as investors reassessed valuations following the Federal Reserve’s latest signal that it will move aggressively if prices remain elevated.

The S&P 500 edged downward in late trading after attempting to rebound from a 1.9 per cent drop sparked by Fed meeting minutes that suggested the central bank is ready to raise rates sooner and higher than previously expected. The hawkish stance hammered the riskiest of assets, from high-priced software stocks to newly-public companies with limited earnings track records. Treasuries continued a selloff, although the velocity of the downdraft eased with the 10-year rate near 1.73 per cent. The dollar was slightly stronger.

The Fed’s overtly hawkish stance has roiled financial markets to start the year, with investors recalibrating how to price assets in an environment of expected high economic growth and rising interest rates. The removal of crisis-era accommodation marks a shift not seen in at least three years, a time that also saw a spike in volatility and ultimately a major stock rout. While rising rates makes capital more expensive and can threaten earnings power, they also come into an economy that continues to expand rapidly.

“We knew coming into 2022 that the Fed was going to be a creator of volatility within the market and we’re seeing that right out of the gate at the start of the year,” Lindsey Bell, chief markets and money strategist at Ally, said by phone. “The good news is that today things seem to be stabilizing a little bit after yesterday’s knee-jerk reaction.”

Comments by regional Fed presidents provided some additional insight Thursday as trader attempted to predict a possible schedule for tightening. St. Louis Fed President James Bullard, a more hawkish policy maker, said in a speech the central bank could raise their target interest rate as soon as March. Meanwhile, San Francisco Fed President Mary Daly said at a virtual event that trimming the Fed balance sheet would come after normalizing the Fed funds rate.

Nicholas Colas, co-founder of DataTrek Research, urged investors to tread “very carefully” the next few days.

“Markets are concerned that we’ve never seen the Federal Reserve both lift interest rates off zero and reduce the size of its balance sheet at the same time. There was a two-year gap between those two events in the last cycle, so it is a valid concern,” Colas wrote. “We’re not predicting a meltdown, but we get why the market swooned.”

U.S. jobless claims figures ahead of Friday’s payrolls report did little to change the market mood. The claims rose to 207,000 last week, the release showed, but stayed within the range of forecasts by 30 economists.

“Labor market strength, coupled with early indications of strong holiday spending, suggests that economic activity has held up reasonably well despite the very rapid spread of the omicron variant,” Solita Marcelli, UBS chief investment officer for the Americas, said. “The Fed minutes don’t alter our base case expectation that equities will continue to move higher, and for the more cyclical markets to be the relative beneficiaries of above-trend U.S. and global growth.”

Treasuries extended their losses, with the rates between the two-year and 10-year tenors adding at least two basis points each. Other government bonds also declined. German 10-year borrowing costs jumped to the highest since May 2019, while their Italian counterparts surged to a June 2020 high. Likewise, Japan’s benchmark yield climbed to the highest since April and the U.K.’s 10-year yield jumped to an October high. 

In Europe, stocks fell, while in Hong Kong, the Hang Seng Tech Index pared back losses to trade higher. 

Bitcoin tumbled to US$43,200. Crude-oil futures extended gains. Gold fell.

Some of the main moves in markets:

Stocks

• The S&P 500 was little changed as of 4:01 p.m. New York time
• The Nasdaq 100 was little changed
• The Dow Jones Industrial Average fell 0.5 per cent
• The MSCI World index fell 0.6 per cent

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro fell 0.2 per cent to US$1.1288
• The British pound fell 0.2 per cent to US$1.3528
• The Japanese yen rose 0.2 per cent to 115.92 per dollar

Bonds

• The yield on 10-year Treasuries advanced two basis points to 1.73 per cent
• Germany’s 10-year yield advanced two basis points to -0.06 per cent
• Britain’s 10-year yield advanced seven basis points to 1.16 per cent

Commodities

• West Texas Intermediate crude rose 2.1 per cent to US$79.49 a barrel
• Gold futures fell 2 per cent to US$1,788 an ounce