Stock markets close in the red after Fed's Powell sees strength in U.S. economy

North American stocks slidacross the board on Tuesday aftercomments by the newFederal Reserve Chairman Jerome Powell on the strength of the U.S. economy pushedbond yields higher.

During his first speech in front of lawmakers in Washington D.C., Powell said that it was his personal view that the U.S. economy had strengthened since December and he saw inflation heading towards the central bank's two per cent target.

"I think each of us is going to be taking the developments since the December meeting into account and writing down our new rate paths as we go into the March meeting and I wouldn't want to pre-judge that," said Powell during the question and answer period after his prepared speech.

Markets started pricing inthe likelihood of a fourth interest rate hikethis year shortly after his comments.

Back in December, the Fed had said that it would raise the benchmark interest rate in the U.S. three times in 2018.

On Wall Street, the Dow Jones industrial average closeddown 1.2per cent or almost 300points to25,410, while the broader S&P 500 index lost 1.3per cent to2,744.

The tech-heavy Nasdaq composite was lower by 1.2per cent to7,330points.

Investors had been awaiting Powell's comments for direction in the equity markets that had somewhat stabilized after volatility that started last month drovebenchmark indexes into correction territory.

The CBOE Volatility index,better known as the VIXwhich is considered the best gauge of expected volatilityon Wall Streetjumped to 18.79points, markingits biggestgain in overtwo weeks.

Bond yields jump

The yield on the benchmark 10-year Treasury note rose to2.89per cent. The bondis considered to be the global driver of borrowing costs.

As interest rates rise, the value of existingbondsfallsand borrowing to invest becomes more expensive.

Analysts at Capital Economics said the Fed is tightening policy "in earnest" and they thinksix rate hikes arelikely by mid-2019.

"With the economy set to receive an additional fiscal boost following the recent deal in Congress to raise the discretionary spending caps, we are revising up our GDP growth forecasts for both this year and next," the research firm said in a note.

Meanwhile, Ranko Berich, head analyst at commercial foreign exchange specialist Monex Canada,said Powell didn't give suggestion of a fundamental change in the Fed's approach to its policy, but his "overall optimism and willingness to acknowledge near term upside risk was enough to give the dollar a boost and hit treasuries."

"Markets appear to finally be waking up to upside risk to the Fed's policy path in the near term, although it remains unlikely we will see more than another three or four hikes this year unless wages and inflation accelerate dramatically."

Canadian reaction

In Toronto, theS&P/TSXcomposite index followed its American counterparts lower to lose 0.3per cent to15,671points.

Some of the biggest drags on the index were the country's biggest medical marijuana producers, whose shares have been declining from their peak in January.

Shares of Canopy Growth fell over threeper cent, while Aphrialost 3.3per cent.

The Canadian dollar, meanwhile, tradedat average of78.49cents US, down from Monday's average price of 78.83 cents US.

The dollar index, which measures the greenback against a basket of major currencies, hit a three week high after Powell was upbeat about the U.S. economy.