Wall Street Slides Wednesday; Dow Drops 600

NEW YORK (AP) -- U.S. stocks are dropping Wednesday as traders scale back expectations for how much relief the Federal Reserve will deliver next week when it begins cutting interest rates.

The S&P 500 was 1.3% lower in morning trading in a wipeout where 96% of the stocks within the index were falling. The Dow Jones Industrial Average was down 649 points, or 1.6%, as of 10:15 a.m. Eastern time, and the Nasdaq composite was 0.8% lower.

Stocks fell following the government's latest update on inflation at the consumer level, which came in close to expectations. Overall inflation slowed to 2.5% in August from 2.9% in July, which was a touch better than expected. But prices rose more from July into August than expected when ignoring gasoline and energy, which economists say can be a better predictor of where inflation is heading.

All together, the data seemed to confirm that the Fed will indeed cut its main interest rate at its meeting next week, which would be the first such cut in more than four years. But it bolstered expectations that the Fed will begin with a traditional-sized move of a quarter of a percentage point instead of the more severe half-point that some had been expecting.

"This isn't the CPI report the market wanted to see," said Seema Shah, chief global strategist at Principal Asset Management.

Investors have a long history of being overly optimistic about how much and when the Fed will cut interest rates, only to send stock prices lower after being confronted with reality.

"We believe the market is pricing in more rate cuts than what will occur this year," said Gargi Chaudhuri, chief investment and portfolio strategist, Americas at BlackRock.

This time, though, the Fed has at least already indicated it's about to begin lowering interest rates as it shifts its focus from fighting high inflation to protecting the job market and keeping the economy out of a recession. With inflation down from its peak of 9.1% two summers ago, the Fed is hoping to ease the brakes off the already slowing economy by making it easier for companies and households to borrow.

A worry on Wall Street is that the cuts may prove to be too late, with many U.S. shoppers already struggling under the weight of still-high prices and stretched ability to spend more.

Vera Bradley's stock dropped 6.5% after the designer of handbags and the parent company of the Pura Vida brand reported weaker profit and revenue for the latest quarter than analysts expected. It pointed to "stubbornly persistent macro consumer headwinds."

Elsewhere on Wall Street, Trump Media & Technology Group dropped 15.5% to worsen its rough run since March. The company behind former President Donald Trump's Truth Social platform has often risen and fallen with expectations for Trump's re-election chances, and he's coming off a debate with Vice President Kamala Harris.

Since closing above $66 in early March, the stock has tumbled to $15.75. That affects Trump particularly because he is the company's largest shareholder.

Bitcoin and other cryptocurrencies -- which Trump has been championing in recent weeks, along with his own crypto company -- fell modestly Wednesday. Bitcoin was down roughly 3%.

In the bond market, the yield on the 10-year Treasury fell to 3.61% from 3.64% late Tuesday. The two-year yield, which more closely follows expectations for Fed action, was sturdier. It edged down to 3.58% from 3.59%.

In stock markets abroad, indexes were mixed in Europe after weakening in much of Asia.

Japan's Nikkei 225 dropped 1.5% after a Japanese central bank official was quoted by Japanese media as indicating the Bank of Japan was getting ready to raise interest rates. The comments also pushed the value of the Japanese yen higher against the U.S. dollar, a move that earlier in the summer helped send financial markets around the world reeling.