March 7 (Reuters) - U.S. stock indexes fell on Tuesday as Federal Reserve Chair Jerome Powell told Congress the central bank will likely need to raise interest rates more than expected as it seeks to rein in rising prices.
The Fed is prepared to move in larger steps if the "totality" of incoming information suggests tougher measures are needed to control inflation, Powell told U.S. lawmakers.
The remarks were his first since inflation unexpectedly jumped in January and the U.S. government reported an unusually large increase in payroll jobs for the month.
Traders dramatically raised their bets of a 50-basis-point rate hike in March after Powell's comments, with money market futures pricing a more than 57% chance of such a move, from 23% before the remarks.
Meanwhile, Fed fund rates were seen peaking at 5.6% in September compared to 5.47% earlier.
"Judging by the initial market reaction, most of this was already priced in, but there must have been some holdouts who truly believed that the Fed would be cutting this year and that is extremely unlikely at this point," said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.
Powell, who will testify again on Wednesday before the House of Representatives Financial Services Committee, also added that the Fed will not consider changing its 2% inflation target and the job market doesn't suggest that an economic downturn was close.
Investors are awaiting data later this week that is expected to show nonfarm payrolls increased by 200,000 in February, compared with the much stronger-than-expected 517,000 jobs reported in January.
"A 50 bps hike in the next meeting is possible, but it is going to be dependent on the payrolls not slowing down and CPI numbers showing that the disinflation progress we've made is stalling," said Scott Ladner, chief investment officer at Horizon Investments.
At 12:18 p.m. ET, the Dow Jones Industrial Average (.DJI) was down 387.49 points, or 1.16%, at 33,043.95, the S&P 500 (.SPX) was down 41.99 points, or 1.04%, at 4,006.43, and the Nasdaq Composite (.IXIC) was down 80.64 points, or 0.69%, at 11,595.10.
All the 11 major S&P sectors fell, with cyclical sectors such as financials (.SPSY) and materials (.SPLRCM) leading declines.
Meanwhile, the yield on two-year Treasury notes , which best reflects short-term rate expectations, rebounded to its highest since 2007 at 4.96%.
Rising bond yields tend to weigh on equity valuations, particularly those of growth and technology stocks, as higher rates reduce the value of future cash flows.
Among individual stocks, Rivian Automotive (RIVN.O) tumbled 12.2% after the electric automaker unveiled plans to sell bonds worth $1.3 billion.
Meta Platforms Inc (META.O) rose 1.0% up after Bloomberg News reported the company will cut thousands of jobs as soon as this week in a fresh round of layoffs.
Snapchat owner Snap Inc (SNAP.N) extended gains by 3.8% after Senator Mark Warner said a bipartisan group of 12 U.S. senators will introduce legislation that would give Commerce Secretary Gina Raimondo new powers to ban Chinese-owned video app TikTok.
Dick's Sporting Goods (DKS.N) rose 10.6% after the retailer forecast annual earnings above Wall Street estimates and more than doubled its quarterly dividend.
Declining issues outnumbered advancers for a 3.24-to-1 ratio on the NYSE and a 1.95-to-1 ratio on the Nasdaq.
The S&P 500 recorded 10 new 52-week highs and six new lows, while the Nasdaq posted 40 new highs and 112 new lows.
