Fed Chair Powell Warns of “Bumpy” Fight Against Inflation, Stock Markets React

Jerome Powell, the Chair of the Federal Reserve, declared before the Senate Banking Committee on Tuesday that the Fed is ready to step up the rate of hikes if the economic figures remain strong.[0] This is in response to the latest economic data that has come in stronger than expected, indicating that the ultimate level of interest rates is likely to be higher than previously anticipated.[1] Powell warned that the fight against inflation still has “a long way to go” and could be “bumpy”, sending stock markets lower.[0]

In the last year, the Federal Reserve has increased interest rates by 4.5 percent in order to reduce inflation.[2] It has been cautioned by authorities that if the rate hikes persist, many businesses could suffer from increased loan charges, eventually resulting in large-scale job losses.[2] The Federal Reserve's projections estimate that approximately two million Americans may become unemployed in the current year as a result of the central bank's attempts to decelerate the economy, a situation which Powell is cognizant of.[2]

The markets didn’t like what Powell had to say, with the Dow Jones Industrial Average falling 575 points, or 1.7%, but Powell knows he can’t let up now.[3] At the press conference that is held after the two-day Federal Open Market Committee (FOMC) meetings, the comments made by the Chair, Jerome Powell, have often caused greater volatility than the prior announcement of the central bank's policy decision and his written remarks. This has happened multiple times in the last few years.[4] The opening statement of Powell made before his semiannual congressional testimony on Tuesday created some market volatility initially, but this was compounded by his answers to senators' queries afterwards.[4]

Investors were estimating a 30% chance of a half-point rate increase later in the week when Tuesday began.[5] At the end of the trading day, the CME FedWatch Tool showed that the probability had increased to 70%.[5] U.S. 2-year bond yields touched a fresh 15-year high of 5.04%, while markets are now pricing in a 50 basis point rate hike at this month’s FOMC policy meeting.[6]

At the meeting later this month, investors anticipated the Federal Reserve to increase rates by 0.25 percentage points.[7] The likelihood of a bigger, half-point increase increased drastically after Powell's testimony.[7]

0. “US debt default could cause ‘longstanding harm,' Fed Chair Jerome Powell says” ABC News, 7 Mar. 2023, https://abcnews.go.com/Politics/us-debt-default-cause-longstanding-harm-fed-chair/story?id=97665681

1. “Why recession odds just spiked after Powell addressed Congress: Morning Brief” Yahoo News, 9 Mar. 2023, https://news.yahoo.com/why-recession-odds-just-spiked-after-powell-addressed-congress-morning-brief-103054745.html

2. “Five takeaways from Powell’s House testimony” The Hill, 8 Mar. 2023, https://thehill.com/business/3890199-five-takeaways-from-powells-house-testimony/

3. “Full Steam Ahead for Jerome Powell – WSJ” The Wall Street Journal, 7 Mar. 2023, https://www.wsj.com/articles/jerome-powell-capitol-hill-federal-reserve-inflation-markets-5da4d66

4. “Powell’s Comments Unleash Unsettling Volatility” The Washington Post, 8 Mar. 2023, https://www.washingtonpost.com/business/2023/03/07/federal-reserve-s-jerome-powell-unleashes-unsettling-market-volatility/d23ecad6-bd32-11ed-9350-7c5fccd598ad_story.html

5. “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

6. “Euro Latest: Euro Area Growth Flatlines, EUR/USD Dancing to Powell’s Tune” DailyFX, 8 Mar. 2023, https://www.dailyfx.com/news/euro-latest-euro-area-growth-flatlines-eur-usd-dancing-to-powell-s-tune-20230308.html

7. “Federal Reserve Chair Jerome Powell warns inflation fight will be long and bumpy” NPR, 7 Mar. 2023, https://www.npr.org/2023/03/07/1161623217/federal-reserve-jerome-powell-senate-inflation-interest-rates-economy-recession

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