Fed Chair Jerome Powell’s testimony yesterday indicates that the Fed will hike the interest rate more aggressively.
He will be back in the hot seat on Wednesday, delivering his second day of semi-annual monetary policy testimony before the House Financial Services Committee. Markets were already jolted in the previous session following comments that suggested the central bank could put an end to its recent shift towards more gradual tightening. The dollar surged and the benchmark S&P 500 Index closed out Tuesday with a loss of 1.5%, while the key 2-year (US2Y) and 10-year (US10Y) Treasury yield curve hit its deepest inversion since 1981.
From the transcript: “The process of getting inflation back down to 2% has a long way to go and is likely to be bumpy,” Powell told the Senate Banking Committee. “As I mentioned, 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. 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.”
The speech shows just how dependent the Fed will be on incoming data ahead of its upcoming policy meeting scheduled for March 21-22. Over the next two weeks, investors will be able to size up their positions on how hard the central bank will go, with a flurry of releases scheduled on the economic calendar. Data points include the JOLTS report today (actual: 10.824M, previous: 11.012M, consensus: 10.5M), the non-farm payrolls on Friday, as well as retail sales, the producer price index and figures on industrial production next week.
SA commentary: “The Fed will soon be entering a blackout period, and this was [Powell’s] last chance to warn the market a rate hike greater than 50 bps is still possible if the data warrants it,” wrote SA Marketplace author Mott Capital Management, outlining that the speech led to a massive repricing of rates. In fact, the CME’s FedWatch Tool now shows a 70.5% chance of a half-point hike, up from 31% before the Fed Chair’s speech.