Markets Drop as Investors Fear the Effects of Higher Rates

Stocks tumbled on Thursday as investors feared that central banks were prepared to continue raising interest rates despite signs of economies already slowing, if not shrinking.

The S&P 500 fell 2.8 percent in afternoon trading, extending losses on Wednesday that came after the Federal Reserve announced a half-point rate increase. The Bank of England and European Central Bank also raised their policy rates by half a point on Thursday.

The drop in stocks was set to be the largest daily decline in months and pulled the index into a loss for the week. The S&P 500 is down more than 18 percent since the beginning of the year.

Policymakers at the Fed and other major central banks have expressed their determination to bring stubbornly high inflation under control by raising rates to cool their economies, even if that means higher unemployment and lower growth. When asked about the possible economic pain caused by the Fed’s policies, Jerome H. Powell, the Fed chair, said that a failure to rein in rising prices would be the most painful.

“We have more work to do,” Mr. Powell said, with forecasts by Fed officials suggesting that they expected rates to peak higher and remain elevated for longer than they previously predicted. That could squeeze the economy harder, and worse-than-expected retail sales data released on Thursday showed that consumers were wary of spending in November, the traditional start of the holiday shopping season.

Investors have been looking for signs that central banks would slow the pace of tightening, and even though the Fed and others this week announced smaller rate increases than in previous meetings, none were wiling to declare victory over inflation. The Bank of England, which has raised rates in nine consecutive meetings, estimated that the British economy was already in recession, but pledged to “respond forcefully” if inflation proved persistent. The European Central Bank said that rates would “still have to rise significantly and at a steady pace” to tame price pressures.

Britain’s FTSE 100 fell by nearly 1 percent and the pan-European Stoxx 600 dropped by 2.8 percent.

The yield on the U.S. 10-year Treasury note fell slightly. Oil prices traded lower while the dollar rose by 1 percent against a basket of other major currencies.