Mid-Week Market Minute 3.8.23

Fed Chair Powell Speaks, Markets Listen

Stocks were lower in early trading this week as markets reacted to comments from Federal Reserve Chair Jerome Powell in testimony before the Senate Banking Committee. Powell said with inflation persisting, the Federal Reserve is likely to raise short-term interest rates higher and potentially faster than previously anticipated. This was a reversal from language last month of a step-down in the pace of hikes. His remarks opened the door to a hike in the Fed’s benchmark lending rate of 0.50% (50 bp) at the next central bank meeting on March 21-22. “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,” Powell told the Senate Banking Committee. “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.” He added, “Although inflation has been moderating in recent months, the process of getting inflation back down to 2% has a long way to go and is likely to be bumpy,” as inflation remains well above the Fed’s target of 2%.

Stocks fell on the comments, and interest rates rose, with the 2-year and 10-year Treasury notes trading up to yields of 5.00% and 3.93%, respectively, as of Wednesday. Market participants now are pricing in about a 75% chance of a 50bp hike at the upcoming March meeting (CME FedWatch data) and two more 25 bp hikes at the next Fed meetings. The peak funds rate is now expected to be around 5.50%-5.75% by summer, a full one percent higher than the current range.

The next week will be chock-full of economic news, beginning with the U.S. employment report on Friday, where nonfarm payrolls are expected to increase by 220,000 for February. Meanwhile, the unemployment rate is forecast to remain at a multi-decade low of 3.4%. Next Tuesday, March 14, the Consumer Price Index (CPI) will be reported for February, where investors will look for a decline in inflation from the previous 6.4% headline number. In addition, markets will get data on manufacturing, retail sales, housing, and industrial production, which should provide valuable guidance to the Federal Reserve for their March 21-22 meeting.

Source: GSAM, CNBC, JPMorgan, Bloomberg

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