Federal Reserve Chairman Jerome Powell told the Senate banking panel on Tuesday that further rate hikes would be needed to stem the recent upward trend in inflation and continued strong job growth. The S&P 500 lost ground in stock market action early Tuesday as markets priced in a higher probability of a 50 basis point rate hike on March 22.
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While Fed policy remains data dependent, Powell’s testimony suggests that Friday’s surprisingly weak jobs report and next week’s CPI report could hold the next rise to 25. base point.
Powell said that the upcoming data, as well as the upward revisions to previous data, “show that inflationary pressures are building higher than expected” by Fed officials when they met in early February. As a result, “interest rates are likely to end up being higher than previously anticipated.”
It is noteworthy that Chairman Powell did not raise half a point off the table for the upcoming meeting. “If the full set of data” warrants, Powell said, the Fed is “prepared to increase the pace of rate hikes.”
Fed rate hike rate
The Fed will also release new quarterly projections on March 22. Chairman Powell’s belligerent testimony suggests officials could offer several additional rate hikes in the coming months. The last forecast in December saw the Fed’s key rate peak in the 5% to 5.25% range this year.
Since the January 3 jobs report showed strong hiring and a lower unemployment rate, financial market prices have undergone a sudden change. Previously, the market expected the Fed to raise rates less than officially forecast and start cutting rates later this year. Prior to Powell’s testimony, the market was valuation only in odds more than 50% that the Fed will raise its base rate to around 5.5% to 5.75% at its September 19-20 meeting. That implies two more hikes than the Fed’s latest projections.
After giving Powell’s testimony, the odds that interest rates will rise to 5.5% -5.75% hit 70%.
Additionally, the rate of a 50 basis point increase on March 22 spiked to 48% from 30% prior to Powell’s testimony. Firmer inflation data and a good jobs report could prompt the Fed to make a half-point move.
S&P 500 . Reaction
After the release of Powell’s testimony, the S&P 500 plummeted, losing 0.7% on Tuesday morning stock market action.
So far, the S&P 500 has largely held its ground over the past few weeks despite hot economic data and rising Treasury yields. So far, the S&P 500 has found support at its 50-day moving average, sparking a rally above that level on Friday. Another test of the 50-day line may be imminent.
As of Monday’s close, the S&P 500 was 15.6% below its record high close but up 13.2% from its December 12 bear market low close. ten.
The yield on the 10-year Treasury note rose one basis point to 3.995% Tuesday morning.
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Powell: The mistake of hiking too much
The Fed has two reasons to keep raising rates that could impose policy in the short term.
First, Fed officials believe that the cost of not rising high enough, which can cause inflation to become entrenched, is far greater than the cost of raising too much. Second, until recently, Fed officials have largely failed to convince the market that interest rates will go higher and stay there longer. That had consequences. Treasury yields fell, lowering borrowing costs and helping bring a second wind to the economy.
Now that the market has finally listened to the Fed, policymakers probably won’t want to raise rates any less than the market is betting on.
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