The stock market witnessed its worst day in over than two years after inflation data crushed investors' expectations that moderating price pressures would compel the Federal Reserve to scale down its interest-rate hike campaign.

Everything from stocks and bonds to oil and gold was sold by investors. The Dow Jones Industrial Average's 30 equities all fell, as did the S&P 500's 11 sectors. Only five of the broad benchmark's stocks closed the session with an increase. Meta Platforms sank by 9.4%, BlackRock fell by 7.5%, and Boeing plummeted by 7.2%.

The Dow Jones Industrial Average sank 1,276.37 points to reach 31104.97 (3.9%). The S&P 500 fell 177.72 points to reach 3932.69 ( 4.3%). Moreover, Nasdaq Composite reached 11633.57 after having fallen 632.84 points (5.2%).

All three indices saw their worst single-day losses since June 11, 2020. The total dip per index was as follows: Dow Industrials (14%); S&P 500 (17%); and Nasdaq Composite (26%).

Investors anticipated the release of the consumer-price index on Tuesday, which would give a final significant look at inflation before the central bank's interest-rate-setting committee meets next week. Expectations for the course of monetary policy have gripped markets as investors incorporate rising interest rates into asset values and attempt to forecast how well the economy will fare as rates increase.

Chris Shipley, Chief Investment Strategist for North America at Northern Trust Asset Management, commented on the topic saying that “It increases the probability of recession if the Fed has to move more significantly to address inflation."

According to recent figures, the consumer-price index increased 8.3% in August compared to the same month that year. Earlier in July, that number was 8.5% while in June it was 9.1%, showing a general decline in the consumer price index rate from June which was considered the highest rate in four decades.

However, on a month-to-month basis, the numbers revealed that inflation accelerated in August, deflating investors' optimism that pricing pressures would lessen, allowing the Federal Reserve to moderate the pace of interest rate hikes in the coming months.

Federal Reserve could overdo interest rate hikes

The Vice Chair of the Federal Reserve, Lael Brainard, admitted the possibility that the US Federal Reserve could cross a threshold in its continuous interest rate hike, a remark that was conspicuously absent from Chair Jerome Powell's address at Jackson Hole, Wyoming, in late August.

Brainard said in a speech delivered in front of a banking group, on September 8, in New York that "At some point in the tightening cycle, the risks will become more two-sided," adding that the velocity with which interest rates rise and the uncertainty surrounding the timing of their economic consequences "create risks associated with overtightening."

Furthermore, the Vice Chair warned that history showed that "it is important to avoid the risk of pulling back too soon," noting that when it comes to inflation, "our resolve is firm, our goals are clear, and our tools are up to the task."

While both Brainard and Powell appear to be completely on board with the Fed's drive to rapidly raise interest rates to combat inflation, Brainard was more inclined than Powell to accept that there are significant dangers to both increasing rates too high as well as risks not raising them high enough.

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