Markets Dip After a Week of Fed Warnings

Stocks fluctuated on Friday, ending a week in which a parade of Federal Reserve officials sought to curb investors’ exuberance over early signs that inflation might finally be slowing.

The S&P 500 rallied in late afternoon trading, ending up 0.5 percent for the day and posting a small 0.7 percent loss for the week.

The modest decline largely preserved the rally that followed recent data releases showing consumer and wholesale prices rising by less than economists had expected.

Investors are focused on inflation data as they look for signs that the Fed’s efforts to slow the economy through higher interest rates are taking effect. If inflation starts to fall, investors hope that the Fed will limit future interest rate increases, which raise costs for consumers and companies, weighing on the stock market.

The S&P 500 remains over 10 percent higher than the low it hit in mid-October. The stock market’s rise creates a problem for the Fed, because it enriches investors who are then able to recycle that money back into the economy, working against the central bank’s efforts to make financial conditions more restrictive.

Several Fed officials sought this week to temper investors’ enthusiasm, warning that there would need to be more evidence of slowing inflation before the Fed would let up on its campaign of rate increases.

“It could easily go the other way in the next report, and I just don’t want to put too much weight on one month’s data,” James Bullard, the president of the Federal Reserve Bank of St. Louis, said on Thursday.

Mary Daly, president of the Federal Reserve Bank of San Francisco, said on Wednesday that she still envisioned raising interest rates by at least another percentage point before stopping to allow time for the effect of the Fed’s rate rises so far to seep into the economy. “Pausing is off the table right now,” she told CNBC in a broadcast interview.

Like Ms. Daly, a number of Fed officials have suggested that interest rates are likely to need to rise higher than policymakers had anticipated as recently as September, and stay there for some time. This “higher for longer” strategy would keep applying the brakes to the economy for months to come.

Market prices for where investors think the Fed’s main policy rate would peak next year nudged above 5 percent on Friday, having fallen last week.

Some investors said the Fed’s hard line had reignited fears that the central bank could raise interest rates too far, choking the economy into recession.

Nearly 80 percent of respondents to a survey this week from Bank of America, which polled 272 investors responsible for more than $700 billion in assets, said they thought the United States was likely to enter a recession in the next 12 months.

Oil prices, sensitive to expectations of demand, fell on Friday, with the price of a barrel of West Texas Intermediate crude oil — the American benchmark — falling below $80 for the first time since September, before ending the day at $80.08.

Also this week, one of Wall Street’s most widely watched recession indicators sounded its loudest alarm yet, as the yield on the 10-year Treasury bond sank further below the yield of the two-year Treasury note, deepening the so-called inverted yield curve. Typically, investors expect to earn a higher yield for lending their money to the government for longer periods. When this relationship is upended, with rates on short-term debt above that of long-term debt, it suggests that investors think the Fed will need to cut interest rates in the future in an attempt to prop up an ailing economy.

“The Treasury yield curve is screaming recession,” said Andrew Brenner, the head of international fixed income at National Alliance Securities. But he added that he was “still not a believer” given signs of resilience across the economy, citing the Federal Reserve Bank of Atlanta’s forecast of 4-plus percent growth for the fourth quarter.

Strong retail sales data this week further complicated the picture for the Fed, adding to signs that the economy remains resilient, which could contribute to stubbornly high inflation.

The mixed picture means that although the Fed is intent on continuing to raise interest rates, it is expected to do so more slowly. Investors expect an increase of a half-point when the central bank meets in December, a step down from the three-quarter-point increases at the past four meetings.

That view was cemented on Wednesday by Christopher Waller, a Fed governor, who said he was more “comfortable” with raising rates by only half a point.

“But I won’t be making a judgment about that until I see more data,” he said.

Susan Collins, the president of the Federal Reserve Bank of Boston, said during an interview with CNBC on Friday that half-point increases were once viewed as large, especially at a time when the Fed already had relatively high rates, adding that a three-quarter point rise in December was “still on the table.”