Business is booming.

Markets plunge on higher-than-expected inflation numbers.

Stocks plummeted, US Treasury yields shot up and the dollar bounced as new inflation data undermined investors’ bets on the slowing inflation rate in August.

The S&P 500 plunged 4.3 percent on Tuesday, the biggest drop since the depths of the June 2020 coronavirus pandemic. Shares had risen in recent trading sessions, rising 1.1 percent on Monday and nearly 5 percent in the past week, as investors increasingly betting on the Fed’s ability to lower inflation by raising interest rates without slowing the economy to the point where it plunges into a severe downturn.

But higher-than-expected August inflation data released Tuesday caught investors off guard, pushing stocks down and requiring a rapid re-evaluation of interest rates to rein in rising prices.

“We’re not out of the woods yet,” said Luke Tilley, chief economist at asset manager Wilmington Trust. “We can’t even see the forest edge from here.”

Bankers and investors clung to the expectation that even with a faster pace of rate hikes, which slow the economy by raising borrowing costs for businesses and consumers, the Fed could still sustain a so-called soft landing, lowering inflation but a little more. serious downturn. Yet there was also widespread recognition that the Fed’s job has been complicated as inflation remains higher than expected.

“The longer the economy holds, the longer household balance sheets can withstand these high prices, the more aggressive the Fed has to be going forward,” said Lauren Goodwin, an economist at New York Life Investments.

Two-year Treasury yields, which are sensitive to changes in the forecasted interest rate path, skyrocketed after the data was released, rising above 3.75 percent, a new record for the year.

Solid labor market data earlier this month pointed to the economy’s resilience after several rate hikes this year. Coupled with policymakers’ persistent message that they are not yet completing their job of cutting inflation by raising rates, investors had already expected another major rate hike, of three-quarters of a percentage point, when the Fed meets next week. For a while, some had bet on a half-point raise as the most likely option.

After the inflation data, bets that the Fed would act aggressively when policymakers meet next week became firmer, with some even beginning to estimate the possibility that the central bank could raise interest rates by a full percentage point, marking the largest rate hike since 1984. to be .

And the US dollar, which had weakened for four days against a basket of currencies representing America’s major trading partners, quickly strengthened on Tuesday, gaining 1.4 percent.