By Geoffrey Smith
Investing.com -- U.S. stock markets reversed early indications of a rebound to open lower Wednesday, after Federal Reserve Chairman Jerome Powell downplayed the prospect of cutting official interest rates below zero and warned of the risk of long-term damage to the economy from the Covid-19 pandemic.
Powell said that while he expected the economy to recover once the U.S. had brought the virus under control, he had an increasing sense that the recovery will take "longer than we would like."
By 10 AM ET (1400 GMT), the Dow Jones Industrial Average was down 150 points, or 0.6% at 23,610 points. The S&P 500 was down 0.3% while the Nasdaq Composite held up better, rising 0.4% as investors shovelled yet more money out of traditional economy stocks and into those perceived as better bets in the post-Covid-19 environment. Zoom Video (NASDAQ:ZM) stock, PayPal (NASDAQ:PYPL) stock and Netflix (NASDAQ:NFLX) stock were all up by more than 2%.
Powell said in a teleconference Q&A with the Peterson Institute of International Economics that data concerning the effectiveness of negative rates was “very mixed”.
“For now, it’s not something that we’re looking at. We think we have a very good toolkit,” Powell said, although he acknowledged that the Fed may yet have to do more in future.
Powell's comments set his institution up for more criticism from President Donald Trump, who urged the Fed to cut below zero on Tuesday via his Twitter feed. However, opinion at the central bank seems solidly behind Powell, in as much as none of the seven colleagues on the Federal Open Markets Committee to have spoken this week have supported the idea.
"Powell and others on Fed were open to (negative) rates in 2018 before they spent a year examining the tradeoffs of neg rates," Diane Swonk, chief economist with Grant Thornton and an adviser to the Fed, said via Twitter. "The Fed put a lot of thought into this before rejecting it as an effective tool. Never say never but Fed did not take this decision lightly."
Among individual stocks, Grubhub fell 3.5% after CNBC reported that the company had rejected an all-share offer from Uber Technologies (NYSE:UBER). The food delivery company's stock had risen nearly 30% on Tuesday in reaction to reports of talks between the two on a merger.
Bank stocks tumbled, more unsettled by Powell's comments about the risks to the economy - and consequently the risk of more bad loans - than reassured by the prospect of rates not being cut further. Citigroup (NYSE:C) stock and Bank of America (NYSE:BAC) stock fell 2.7%, while JPMorgan (NYSE:JPM) stock fell 1.6%.
Elsewhere,U.S. crude prices also reversed gains as Powell's comments hit the outlook for oil demand from the U.S. economy. Front-month prices fell 1.2% to $25.46 a barrel.