Dow down 400 points as investors fret over Fed inclination to push rates higher
U.S. stock losses mounted midsession Tuesday as investors soaked in Federal Reserve Chairman Jerome Powell’s hawkish message to Congress that the central bank will not rule out bigger interest rate rises in order to tame stubborn inflation.
How are stocks are trading On Monday, the Dow Jones Industrial Average DJIA, -0.98% rose 40 points, or 0.12%, to 33431, the S&P 500 SPX, -0.84% increased 3 points, or 0.07%, to 4048, and the Nasdaq Composite COMP, -0.36% dropped 13 points, or 0.11%, to 11676. What’s driving markets “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,” Powell said in prepared remarks to the Senate Banking Committee that, some are saying, is more hawkish than expected even while recent inflation data is coming in higher than hoped. In February, the Fed raised the federal funds rate by 25 basis points, a more gradual pace, but the takeaway from his speech is a future 50 basis point hike could be in play. The Fed’s next meeting on interest rates is scheduled for March 21-22. It’s now more likely than not that the the Fed will increase the benchmark rate by 50 bps during the March meeting, according to Fed funds futures traders on Tuesday. While traders said the chance is now more than 50%, it was around 30% one day earlier. The Tuesday morning comments underscore Powell’s willingness to keep interest rates higher for longer, launching the start of a critical week for markets. Powell will also be quizzed by the House of Representatives’ Financial Services Committee on Wednesday. The semiannual testimony comes days ahead of the February jobs report on Friday. The economy added 517,000 jobs in January, tearing past expectations and other recent data included a higher-than-expected January print for the Fed’s preferred inflation data. Sometimes the nuance and balance in Powell’s comments have let investors spot wording they view as a softening stance on more rate hikes, said Stephen Stanley, chief economist of Santander U.S. Capital Markets. Not this time, said Stanley. “Today’s speech reminds me of that Jackson Hole speech. It is short and to the point. More importantly, it is significantly more hawkish than I anticipated.” During a speech last summer in Jackson Hole, Wyoming, Powell said using interest rate hikes to fight inflation would bring “some pain to households and businesses.” “So much for the repeated dovish mentions of disinflation at the last press conference,” tweeted Mohamed El-Erian, president of Queens’ College at the University of Cambridge and a professor at the University of Pennsylvania’s Wharton School. “Powell has a great way of smoothing over the rough spots. I think what caught people by surprise is the unvarnished hawkisness, rather than his comments where he can sometimes balance his hawkishness with something more market friendly,” Steve Sosnick, chief strategist at Interactive Brokers IBKR, +0.45%, said in a phone interview. Maybe some investors were growing “complacent” that the story line would be a gradual easing of interest rates, but Sosnick said Powell’s stance is “very much in line with data dependence” that Powell has been emphasizing. That puts extra urgency on what the numbers reveal in February’s jobs report, he said. The S&P 500 index sits near the middle of the 3,800 to 4,200 range within which it has meandered for about four months, with equity investors seemingly able to absorb a recent lurch upwards in bond yields TMUBMUSD10Y, 3.950%, which has come after a spate of data showing resilient economic growth, which may force the Fed to keep borrowing costs higher for longer. Powell’s comments were a jolt to the Treasury market. The 2-year Treasury TMUBMUSD02Y, 4.964% yield jumped closer to 5% on Tuesday. Economic data releases Tuesday include January wholesale inventories, which declined for the first time since mid-2020. The numbers, matching the estimates of economist polled by the Wall Street Journal, indicate businesses are shrinking their amount of unsold goods to correspond with softening consumer demand. Reports on January consumer credit are slated for release at 3 p.m.
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