"[The] primary concern has to be inflation and the longer-term consequences of not getting a grip of it immediately," said Craig Erlam, analyst at online trading platform OANDA. "Investors will be paying very close attention."
The S&P 500 index, representing the top 500 US stocks, closed down almost 1.2% on Tuesday. It was the index’s biggest daily decline since a 2% drop on June 28.
The Dow Jones Industrial Average, comprising stocks of 30 large US corporations, settled down 0.7%. It was also the Dow’s biggest drop in almost a month since a 1.6% drop on June 28.
The Nasdaq Composite, which comprises marquee technology names such as Amazon, Apple, Netflix and Google, finished down 1.9%. It was the tech barometer’s sharpest setback in two weeks, after a drop of 2.2% on July 11.
Stocks fell after a rash of negative US data on housing to consumer confidence.
Sales of new US homes fell just over 8% in June from a month ago and were down double-digits from a year earlier, according to government figures that reinforced the notion of a housing market weakening from surging mortgage rates and declining consumer confidence.
US consumer confidence, meanwhile, fell for a third month in a row in July, The Conference Board said, as Americans’ anxiety about a potential recession grew from Federal Reserve rate hikes aimed at curbing inflation at 40-year highs.
"As the Fed raises interest rates to rein in inflation, purchasing intentions for cars, homes, and major appliances all pulled back further in July," said Lynn Franco, senior director of economic indicators at The Conference Board, which groups public and private corporations that track and publish economic statistics. "Looking ahead, inflation and additional rate hikes are likely to continue posing strong headwinds for consumer spending and economic growth over the next six months."
The Federal Reserve is likely to hike rates by 0.75% on Wednesday, in what would be its fourth rate hike since March. Rates stood at 0-0.25% in February and could range at 2.0-2.5% by Wednesday.
The central bank has the option of three more rate revisions before the year-end. Despite such increases, inflation measured by the Consumer Price Index expanded by 9.1% in the year to June, its highest in four decades. The central bank’s tolerance for inflation is a mere 2% per year.
Economists say the Federal Reserve risks pushing the economy into a recession if it continues with its present trajectory of rate hikes. US gross domestic product (GDP) already declined 1.6% in the first quarter. The Commerce Department will issue its first reading for second quarter GDP on Thursday, with only a negative required to technically send the economy into a recession.