Investors were scared by a Federal Reserve Chairman Jerome Powell’s hawkish testimony to Congress, which led to a sharp fall in the stock market and a spike in short-term interest rates.
The Dow Jones Industrial Average fell 575 points or 1.7%. S&P 500 fell 1.5% and Nasdaq Composite dropped 1.3%.
Edward Moya, Oanda senior market analyst, wrote that Fed Chair Powell had killed risk appetite by being hawkish on Capitol Hill’s first day.
On Tuesday, Powell addressed the Senate Banking Committee and made hawkish comments. These are statements that indicate an intention to keep interest rates higher than they currently are. The House Financial Services Committee will follow his semi-annual testimony Wednesday.
We would consider increasing the rate of rate increases if the data indicated that tightening was necessary faster. In his opening remarks Tuesday, Powell stated that restoring price stability will likely require us to maintain a restrictive stance on monetary policy for some period.
He was concerned about the warmer-than-expected January employment report. This suggests that inflation could remain higher than originally expected in the next months. This would lead to higher rates for longer periods of time, before the Fed reduces rates.
Economic data such as inflation or employment numbers show that inflation is on the decline but could still remain high for a while. Inflation can be slowed by increasing economic demand. Rate increases are intended to do this.
Jeffrey Roach, Chief Economic Economist at LPL Financial, stated that “if economic data remains robust and inflation refuses budge lower,”.
Markets are continuing to show a hawkish attitude. In recent weeks, the stock market has fallen a little from its February 2nd closing high, which was about 4.1%. This has happened as bond yields have increased, with the 2-year Treasury yield, which is a barometer of expectations about the ultra-short-term federal funds rates, up to just above 5% from the February 2023 low of 4.1%. CME Group data shows that the odds of the Fed raising the rate by half a percentage point at its March meeting are now 70%.
It’s not just the yield curve, but the two-year yield. The yield on the two-year note is about one percentage point higher than the yield on the 10-year note, which fell slightly over the day. Longer-term rates tend to be higher because investors are willing to pay more for inflation. Investors may be willing to purchase the 10-year note at this price if the Fed is able to reduce inflation sufficiently to keep its yield and price high. A declining stock market is consistent with an “inverted” yield curve.
Charles Schwab’s chief fixed income strategist Kathy Jones stated that “we expect yield curve inversion to continue to deepen so long as the Fed continues its tightening path.”
Powell’s comments set the scene for Friday’s release of the February jobs report. This will be the biggest event this week for markets.
Economists expect the U.S. to have added 225,000 jobs in February, which would be a decrease from January’s 517,000. Any sign of a cooling economy — but not ice-cold — would be welcomed by the markets, which would suggest that the Fed could have its last rate hikes.
Andrew Hollenhorst, Citi economist, stated that if Friday’s employment data are strong we believe a 50bp increase would be more likely.