Powell announced the need to raise the rate by 0.50 bp
2023.03.07 12:14
Powell announced the need to raise the rate by 0.50 bp
By Ray Johnson
Budrigannews.com – According to Fed Chair Jerome Powell’s statement to U.S. lawmakers on Tuesday, the Federal Reserve will likely need to raise interest rates more than anticipated in response to recent strong data and is prepared to move in larger steps if the “totality” of incoming information suggests that tougher measures are required to control inflation.
In his prepared remarks for a hearing before the Senate Banking Committee, Powell stated, “The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated.”
After Powell’s remarks, his first since inflation unexpectedly jumped in January and the government reported an unusually large increase in payroll jobs for that month, U.S. stocks sold off, Treasury yields rose, and the dollar extended a gain.
ACTION ON THE MARKET:
STOCKS: lost 35.76 points, or 0.88 percent, to 4,012.66 from roughly flat prior to Powell’s remarks BONDS: After the remarks, the 10-year note from the United States Treasury was last down 4/32 with a yield of 3.99 percent, up from 3.98 percent late on ThursdayFOREX: The euro suffered a loss and was down about 0.8%, while the rose.
“The futures market had priced in a nearly 30% probability of a 50 basis point rate hike prior to the meeting.”
“If the data suggest that inflation continues to move in the wrong direction, Powell makes it clear that the Fed would respond accordingly.” The equity market is also reacting, but they are unsure of what the CPI and PPI will reveal at this point.
However, Powell made that statement with sincerity. The market was very clear that the Fed will not contradict data that suggests inflation will continue to rise or remain sticky.
“It is evident that the stock and bond markets are reacting to Powell’s talking points, particularly the notion that interest rates are likely to be higher than anticipated. Powell explicitly mentions a higher interest rate target. The market has been talking about this, but it clearly hasn’t been fully priced in.”
“The idea that rates are going to be higher for a longer period of time is going to be a headwind for stocks and bonds… a lot of people have been expecting this would be the case, but hearing it directly from Powell is a little different from inferring it from the data,” the author stated.
“We would need to see a deterioration in fundamentals for the market to fall apart more significantly. As a result, either the economy might enter a recession or corporate profits might plummet. We haven’t seen that yet, so I don’t think the market will completely collapse. However, I do think this will set a more risk-off tone than January did.
“The most obvious conclusion from everything we’ve seen over the past month is that this market reaction is slightly surprising me. It is likely that this instinctive move lower in stocks will return to flat.”
“The terminal rate of six percent would be slightly higher than it is likely to be. They will probably settle somewhere between five and a half and five and three quarter.”
“A 50 basis point increase at the next meeting is possible, but it will depend on payrolls not slowing down and CPI numbers showing that our progress in reducing inflation is stalling. “Fed Chair Powell made a surprisingly hawkish statement this afternoon, putting the possibility of a 50 bps hike for March on the table and expressing disappointment about the lack of progress on inflation so far.”
Markets are reminded once more by this that the Fed is determined to tighten financial conditions and keep them tight. Obviously, the dollar has acquired, and the two bonds and stocks swayed lower.”
“Despite the hawkish repricing, Powell reiterated that the peak rate is likely to be higher than expected, putting bond bears and dollar bulls back in control, with Friday’s hot NFP print likely to see calls for a 6% terminal rate increase,”
“The Fed’s primary goal is to reduce inflation to 2%. “The market is feeling a little nervous about the Fed’s next move—how many rate hikes are coming and how long are they going to keep rates up—and Powell is reiterating what we already know, but he is not saying anything that is dovish.”
“I would prefer just one more 25-basis-point rate increase, but it is likely that we will receive three 25-basis-point rate increases.” They basically repeat that price stability is difficult to achieve and that the economy is slowing. The Fed will continue to raise rates, so inflation is just what the market doesn’t want because it is sticky and not moving in the right direction.”
“I don’t think it gives anyone the impression that a recession will be more severe or dramatic than they already fear. There are those worries out there.”
