Small caps drop on inflation worries

The Russell 2000 (IWM) fell as comments from Fed officials stating that inflation remains a concern erased early gains. The small-cap index fell 9.09 points, or 1.30%, to 692.49, its third consecutive decline. The Dow Jones Industrial Average (INDU) lost 65.03 points, or 0.53%, to 12,200.10.

On a year-to-date basis, the Russell 2000 has decreased 9.60%, while the Dow has let go 8.03% and the S&P 500 is missing 9.66%.

“It will be necessary to continue to monitor inflation developments carefully,” Philadelphia Federal Reserve Bank President Charles Plosser said in a speech to the Birmingham Rotary Club this afternoon. “With inflation creeping up, we have to be particularly alert for rising inflation expectations.”

Similarly, Richmond Federal Reserve Bank President Jeffrey Lacker told an audience at Marshall University’s Lewis College of Business that the risks of a recession have recently increased while inflation has not moderated as some expected, according to news reports.

Higher inflation makes it difficult for the U.S. Federal Reserve to boost the economy with cuts to the target federal funds rate for fear that lower interest rates could drive inflation even higher.

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