Fed Chair Powell Testifies: Markets React as Rate Hikes Expected to Curb Inflation
On Wednesday, Jerome Powell, the Chair of the Federal Reserve, gave testimony to the House Financial Services Committee concerning lingering anxieties around inflation and recession.[0] He acknowledged that recent data has come in “stronger than expected,” which implies the ultimate level of rates “is likely to be higher than previously anticipated.”[1] This suggests that the Fed will likely raise rates higher than the 5.1% implied by its last official forecasts in December and that the central bank could increase the pace of rate hikes if the data suggests it.
Inflation has been moderating in recent months, but the process of getting inflation back to 2% has a long way to go and is likely to be bumpy, Powell said.[2] He also warned that Congress must raise the debt ceiling as the Fed doesn't have the tools to prevent or mitigate the economic catastrophe resulting from an unprecedented U.S. debt default.[3]
The stock market responded negatively to Powell's testimony, with the Dow Jones Industrial Average tumbling 1.7%, the S&P 500 index skidding 1.5%, and the Nasdaq composite giving up 1.25%. The 10-year Treasury yield edged up one basis points to 3.995%.[4]
Odds of a 50-basis-point Fed rate hike on March 22 shot up to 70.5%, up from 31% on Monday and 24% a week earlier.[5] The CME FedWatch tool is predicting that markets are pricing in a 69.4% chance that the Federal Reserve will hike interest rates by 25 basis points to a range of 4.75% to 5% on March 22.
The Fed's projections have estimated that up to two million US citizens may be out of work this year due to the central bank's attempts to slow the economy, as acknowledged by Powell.[6] He cautioned against aggressive rate hikes, noting that a recession brought on by the Fed would disproportionately harm lower-income Americans.[3]
Overall, Powell's remarks indicate that the Fed is likely to continue raising rates in order to curb inflation and that this could have serious consequences for the economy, particularly for lower-income Americans.[7] Markets will be watching closely for further developments.
0. “Watch Fed Chair Jerome Powell speak live in second day of Capitol Hill testimony” CNBC, 8 Mar. 2023, https://www.cnbc.com/2023/03/08/watch-fed-chair-jerome-powell-speak-live-in-second-day-of-capitol-hill-testimony.html
1. “Why the next slate of economic data is so important” Axios, 7 Mar. 2023, https://www.axios.com/2023/03/07/economic-data-federal-reserve
2. “High Rates’ Pain Is Others’ Gain: Here Are 2 Stocks That Could Benefit From the Fed’s Tightening Policy” TipRanks, 8 Mar. 2023, https://www.tipranks.com/news/article/high-rates-pain-is-others-gain-here-are-2-stocks-that-could-benefit-from-the-feds-tightening-policy
3. “Five takeaways from Powell’s House testimony” The Hill, 8 Mar. 2023, https://thehill.com/business/3890199-five-takeaways-from-powells-house-testimony/
4. “Nasdaq, S&P 500 Futures Point To Cautious Optimism As Traders Look Ahead To More Of Powell, ADP Private P” Benzinga, 8 Mar. 2023, https://www.benzinga.com/news/earnings/23/03/31253699/nasdaq-s-p-500-futures-point-to-cautious-optimism-as-traders-look-ahead-to-more-of-powell-adp-priva
5. “Dow Jones Futures RiseAfter ‘Faster' Fed Chief Powell Hits Stocks; Tesla Falls On New Probe” Investor's Business Daily, 8 Mar. 2023, https://www.investors.com/market-trend/stock-market-today/dow-jones-futures-faster-fed-chief-powell-hits-stocks-tesla-falls-below-key-level/
6. “Jerome Powell's testimony sent markets reeling. That may be a good thing” CNN, 8 Mar. 2023, https://www.cnn.com/2023/03/08/investing/premarket-stocks-trading/index.html
7. “Stock Market Today: Blue Chip Stocks Lead Market Lower After Powell Speech” Kiplinger's Personal Finance, 7 Mar. 2023, https://www.kiplinger.com/investing/stocks/stock-market-today-030723-blue-chip-stocks-lead-market-lower-after-powell-speech
