Stocks on Wall Street had their worst week in nearly four months after comments from Federal Reserve policymakers that signalled the US central bank was acutely aware of budding inflationary pressures.

The benchmark S&P 500 slid 1.3 per cent on Friday, taking its losses for the week to 1.9 per cent. Roughly 90 per cent of the stocks in the blue-chip index were lower on the day, including shares of big banks and US oil majors.

Investors shifted out of some of their most popular trades of the year, including an earlier push into shares of smaller companies seen as particularly sensitive to economic growth. The small-cap Russell 2000 index recorded its heaviest weekly loss since late January, falling more than 4 per cent.

The moves followed comments from Jay Powell, Fed chair, on Wednesday that investors took as a signal that the US central bank would act to tame inflation and that policymakers were not solely focused on aiding the country’s hard-hit labour market.

Fed policymakers on Wednesday projected that interest rates would rise from record-low levels in 2023, from their earlier forecast of 2024. That view came into sharper focus following an interview James Bullard, president of the St Louis Fed, held with television network CNBC on Friday, where he said the first rate rise could come next year.

Line chart of Week-to-date performance (%) showing US stocks suffer worst week since February

The shift by Fed policymakers has shaken the so-called reflation trade, and instead helped buoy technology stocks that had lost momentum this year. While the tech-heavy Nasdaq Composite was 0.9 per cent lower on Friday, it ended the week down only 0.3 per cent.

Inflation expectations have been dramatically marked down this week as investors digested the latest Fed decision. George Saravelos, a strategist with Deutsche Bank, noted that shifting inflation and growth expectations were “consistent with continued equity resilience, especially in growth stocks”, where lower bond yields make the value of future earnings more appealing.

He added that the fact the swings in financial markets were “led by huge relative rotation from the Russell to the Nasdaq should not be a surprise”. Saravelos compared it to the market between 2010 and 2019, when the valuations of growth stocks surged on the back of moderate or low growth and low inflation.

The equity declines accompanied a rally in long-term US government bond prices on Friday as investors viewed the earlier-than-expected projections of a US rate rise as a signal of the central bank’s willingness to control inflation.

The yield on the benchmark 10-year US Treasury bond, which moves inversely to its price, was 0.06 percentage points lower at 1.44 per cent.

Line chart of Yield (%) showing 10-year Treasuries rally as fears of high inflation cool

This yield has climbed from about 0.9 per cent at the start of the year but has moderated in recent months as investors have come to view leaps in US inflation as temporary. Persistent inflation erodes the fixed-interest returns on bonds.

“Markets are now anticipating the Fed tightening sooner, which could dampen economic growth, hence the drop in the 10-year yield, and a rotation away from the [pandemic] reopening trade and towards more secular growth parts of the stock market such as tech,” said Kristina Hooper, Invesco’s chief global market strategist.

The dollar also enjoyed its best week since April 2020 as yields on short-term Treasuries rose, pricing in future expected rate rises. The dollar index, which measures the greenback against big currencies, rose 0.4 per cent on Friday, taking its weekly gain to 1.9 per cent.

Gold, which is priced in dollars and often moves inversely to the US currency, traded at $1,764 an ounce on Friday — a decline of more than 6 per cent since Monday in its largest weekly fall since March 2020.

“Because of the hawkish surprise of rate rise expectations having been brought forward, you’ve seen a pretty aggressive move in the dollar,” said Keith Balmer, multi-asset portfolio manager at BMO Global Asset Management. “Most of the market was bearish on the dollar ahead of this meeting,” he said, as traders had previously anticipated the Fed keeping monetary policy ultra-loose.

Line chart of Dollar index showing Bearish calls on the dollar are hit by rate rise forecasts