Stocks fell sharply on Wall Street and short-term Treasury yields rose to 14-year highs after fresh evidence of overheating U.S. inflation fueled fears that the Federal Reserve will be forced to take aggressive monetary action to slow economic growth.

The broad-based S&P 500 fell 2.7%, while the tech-heavy Nasdaq Composite, which includes rate-sensitive growth stocks, lost 3.4%. Both indices are on track for their worst one-day performance since May 18.

Two-year U.S. Treasury yields rose in line with interest rate expectations, rising to 3 percent, the highest level since 2008, the last time it crossed the important psychological threshold of 3 percent.

The yield on the 5-year Treasury bond once exceeded the yield on the 30-year Treasury bond, indicating that the market believes that the Fed’s interest rate hikes may push the U.S. economy into recession.

The U.S. government’s consumer price index report showed inflation rose to an annualized 8.6 percent in May, up from April’s 8.3 percent reading and beating economists’ forecasts as food, energy and housing prices all rose.

The Fed is widely expected to raise key interest rates by another half a percentage point at its policy meeting next week. At the Fed’s May meeting, Chairman Jay Powell prepared for a 0.5 percentage point rate hike in June and July, but there were some doubts about whether the Fed would continue at that pace at its September meeting. Markets also fully priced in a 0.5 percent rise in September following Friday’s inflation data.

The futures market now expects the Fed’s benchmark rate to reach 3.2% by year-end, implying 0.5 percentage point hikes at the Fed’s next four meetings (June, July, September, and November) and December 25 basis points.

“The market believes the Fed is going to have to tighten policy further, which increases the risk of a recession,” said Brian Nick, chief investment strategist at Nuveen.

The Stoxx 600 in Europe fell 2.6 percent as worries about the U.S. outlook intensified concerns about the impact of a euro zone rate hike on financially weaker European nations.

U.S. and European stocks also fell on Thursday, when the European Central Bank unnerved markets by announcing its own plan to tighten monetary policy.

The European Central Bank, long one of the accommodative central banks in the world, said on Thursday it could raise its main deposit rate above zero in September, the first time it has moved out of negative interest rates in eight years. It also said it would end net purchases of member states’ debt, raising concerns about financial stress in the EU’s weaker economies.

“The message to the market is that the priority now is to contain inflation, not growth,” said Paul O’Connor, head of Janus Henderson’s multi-asset team in the UK.

“The ECB’s hawkish stance,” he added, “is a huge setback for global bulls as it reinforces the idea that the central bank will not stop fighting inflation.”

The FTSE index of developed and emerging market stocks fell more than 2.6%, on track for its biggest weekly drop since October 2020.

Germany’s 10-year government bond, the benchmark for borrowing rates in the region, rose 0.07 percent to 1.5 percent, its highest level since 2014.

Italian 10-year bond yields rose 0.15 percentage points to 3.74 percent, more than triple the level at the start of the year.

In Asia, Hong Kong’s Hang Seng was flat and Tokyo’s Nikkei 225 fell 1.5%. Mainland China’s CSI 300 rose 1.5%.