The S&P 500 and the Dow fell more than 1% on Thursday, while the tech-heavy Nasdaq slumped 2% after data showed consumer prices surged 7.5% in January, marking the biggest annual increase in 40 years.
Further, St. Louis Fed Bank President James Bullard, a voter on the Fed's rate-setting committee this year, told Bloomberg News on Thursday he wants a full percentage point of rate hikes over the next three policy meetings.
Growth stocks were the hardest hit on Thursday, with rising rates dulling an appeal for highly valued names. Shares of Tesla, Apple, Google-parent Alphabet and Microsoft Corp inched 0.3% higher in premarket trading after suffering losses in the range of 2%-3%.
"We've got some element of calm coming into the market, that's the digestion of the news," said Seeema Shah, chief strategist at Principal Global Investors. "The Fed doesn't want to send an alarm signal, they want to look like they have a stable grip on the situation, and not send everyone running around."
The inflation data and subsequent comments from Bullard drove investors to ramp up bets of rate hikes this year.
Traders are pricing in a big half-point rate hike in March with just a scant chance of a smaller quarter-point hike, and heavy bets for a policy path that would bring rates to a range of 1.75%-2.00% by the end of the year.
At 8:51 a.m. ET, Dow e-minis were up 50 points, or 0.14%, S&P 500 e-minis were up 8.5 points, or 0.19%, and Nasdaq 100 e-minis were up 35 points, or 0.24%.
Despite the recent bout of volatility in markets, the three major indexes are on track for weekly gains, helped by strong earnings, reduction in COVID-19 cases and lifting of mask mandates in some states.
Investors are awaiting the University of Michigan's Consumer Sentiment Index that is expected to rise to 67.5 in February from 67.2 in January, the lowest since November 2011.
Online real-estate platform Zillow Group Inc jumped 12.8% after beating Wall Street estimates for quarterly sales, boosted by an 11-fold increase in revenue in its homes segment.
Cloudflare Inc rose 6% on breakeven earnings and a better-than-expected full-year outlook, while Under Armour Inc fell 2% after warning that its profit margin would be under pressure in the current quarter.
(Reporting by Bansari Mayur Kamdar in Bengaluru; Editing by Maju Samuel)
By Bansari Mayur Kamdar