The chyron on the screen read “Biden Celebrates Passage of His Inflation Reduction Act” but CNN decided to cut away, noting “this unfortunate split screen” created by the DOW taking a “total beating.” “Feels like it’s hard to be celebratory,” the host suggested apologetically.

CNN cuts away from Biden to highlight the "Dow taking a total beating."

"Feels like it's hard to be celebratory" pic.twitter.com/FcbqGSGVZv

— Scott Sloofman (@ScottSloofman) September 13, 2022

Indeed, it’s hard to celebrate when the DOW is down 1,276 points in a day which is just shy of 4%. Stocks had been recovering over the previous five days but now all of those gains have been wiped out. Things were just as bad on the S&P 500 and Nasdaq:

The S&P 500 dropped 4.32% to 3,932.69, and the Nasdaq Composite sank 5.16% to end the day at 11,633.57.

Just five stocks in the S&P 500 finished in positive territory. Tech stocks were hit particularly hard, with Facebook-parent Meta skidding 9.4% and chip giant Nvidia shedding 9.5%.

The drop erased nearly all of the recent rally for stocks, pulling the S&P 500 back toward its Sept. 6 close of 3,908 and causing some traders to glance back at mid-June, when the index fell below 3,700.

“I think we may even go back and retest the June lows,” UBS director of floor operations Art Cashin said Tuesday on CNBC’s “Squawk on the Street.”

Ed already walked through the reasons for this decline earlier today. It can be summed up in one word: Inflation.

More recently, with a sense that the Fed’s message had been received and that a higher path forward for interest rates had been accounted for, stocks began to rise again. Even before the inflation data was released on Tuesday, investors had come to expect another big rate increase, of three-quarters of a percentage point, when the Fed meets next week.

Following Tuesday’s surprising data, expectations are shifting again. Some investors are even starting to price in the possibility that the central bank could lift interest rates by a full percentage point, increasing borrowing costs by the most since 1984. Among them is the Japanese bank Nomura, which in just the past week has shifted from predicting the Fed would lift rates by half a percentage point, to three quarters, to a full point on Tuesday.

“We continue to believe markets underappreciate just how entrenched U.S. inflation has become and the magnitude of response that will likely be required from the Fed to dislodge it,” the analysts wrote in a research report…

Futures prices that reflect investors’ changing expectations for where interest rates will be at the end of the year have quickly jumped higher. They’re now predicting an upper limit of 4.25 percent, adding an additional quarter-point to previous forecasts and meaning the Fed is expected to raise interest rates another 1.75 percentage points over the next three months.

On that last point, I’ll just remind you that back in March Larry Summers gave an interview to Ezra Klein at the NY Times and he predicted that in order to bring inflation under control we’d need to see interest rates above 4%.

My basis is simply this— we think about the effects of monetary policy in terms of what economists call real interest rates— interest rates minus the rate of inflation. And the idea is that when real interest rates go up, people want to save more, people want to spend less, because capital is more expensive.

And so in order to restrain the economy, you have to raise the level of real interest rates. Real interest rates right now over every horizon are substantially negative. Not just over one year. Not just over five years. They’re actually negative over 30 years…

A real interest rate to be negative means that if I buy a bond, the money I will get back from the bond will have less purchasing power than the money that I put into the bond. If the interest rate were negative, that would mean I get less money back than I put into the bond. If the real interest rate— that is the interest rate adjusted for purchasing power— is negative, that means I get less purchasing power, less ability to buy things back.

And so when you have an economy where you can get more for your money today than you can if you put it aside or where you can borrow money at lower cost than you’re going to have to pay back when the bond comes due, that’s an economy that’s going to encourage spending today, and it’s going to encourage spending today at a substantial rate.

I don’t think we’re going to avoid and bring down the rate of inflation until we get to positive real interest rates. And I don’t think we’re going to get to positive real interest rates without, over the next couple of years, getting interest rates north of 4 percent.

So it’s looking increasingly likely that Summers will be right again.