The Federal Reserve’s outlook on the US economy and rate hikes has been called into question following the release of the January jobs report, which showed that the US economy added 517,000 jobs last month, far surpassing economists’ forecasts. Fed Chair Jerome Powell addressed this in an interview with David Rubenstein of the Economic Club of Washington on Tuesday, saying that the disinflation process has only just begun and that additional interest rate hikes will be needed to bring inflation down to the Fed’s target of 2%.[0]
The Fed’s benchmark interest rate has been increased eight times since the start of the pandemic, and Powell said that the central bank is likely to hike rates again in the coming months.[1] Markets are now pricing in a 100% chance of a quarter-point increase on March 22, and 76% odds of another quarter-point increase on May 3.[2] This would bring the federal funds rate to a 5%-5.25% range, which is higher than the Fed’s December projection.[2]
Powell also discussed how the strong labor market report indicates that the disinflation process will take a long time, and that interest rates will need to remain at a restrictive level for an extended period of time. He noted that although the disinflation process has started, it will take “not just this year but next year” to get the inflation rate down to 2%.[3]
Analysts expect the Fed to raise interest rates to just above 5% in order to ease wage pressure in the labor market and begin to cool inflation to the Fed’s 2% target.[4]
Market reaction to Powell’s comments have been mixed. The Dow Jones Industrial Average fell 0.1%, and the S&P 500 lost 0.6% while the Nasdaq composite sold off 1%.[5] Huw Roberts, head of analytics at Quant Insight, said that “even if he says nothing of interest, that’s important. More benign neglect from Powell will be interpreted as a green light for risky assets to keep rallying.”[6]
Investors will be looking for more clues about the path of US interest rates today, with Powell’s speech before the Economic Club of Washington offering insight into the future of rates.[7] Chinese search engine Baidu (BIDU) jumped 12% Tuesday morning after indicating it’s on track to unveil its AI service in March.[6]
0. “Powell Says Further Rate Hikes Needed Amid ‘Strong’ Labor Market” Bloomberg, 7 Feb. 2023, https://www.bloomberg.com/news/articles/2023-02-07/powell-says-further-rate-hikes-needed-amid-strong-labor-market
1. “Fed’s Powell speaks on economy, job market” The Washington Post, 7 Feb. 2023, https://www.washingtonpost.com/business/2023/02/07/powell-economy-jobs/
2. “Fed Chair Jerome Powell Sticks To Disinflationary Script; S&P 500 Slips” Investor’s Business Daily, 7 Feb. 2023, https://www.investors.com/news/economy/fed-chair-jerome-powell-sticks-to-deflationary-message-sp-500-rises/
3. “Fed Chair Powell: Inflation fight will take ‘a significant period of time’” CNN, 7 Feb. 2023, https://www.cnn.com/2023/02/07/economy/jerome-powell-economic-club-speech/index.html
4. “Fed says more interest rate rises needed to cool inflation” The Guardian, 7 Feb. 2023, https://www.theguardian.com/business/2023/feb/07/fed-jerome-powell-interest-rates-inflation
5. “Dow Jones Falls Ahead Of Powell Speech; BBBY Shares Crash 47% On Equity Offering” Investor’s Business Daily, 7 Feb. 2023, https://www.investors.com/market-trend/stock-market-today/dow-jones-futures-fall-ahead-of-powell-speech-bbby-shares-crash-on-proposed-equity-offering
6. “Stock market news live updates: Stocks swing as investors mull Powell remarks” Yahoo News, 7 Feb. 2023, https://news.yahoo.com/stock-market-news-live-updates-february-7-2023-120657185.html
7. “Stock Market Today: Dow, Nasdaq Close Over 200 Points Up After Remarks By Fed’s Powell” The Wall Street Journal, 7 Feb. 2023, https://www.wsj.com/livecoverage/stock-market-news-today-02-07-2023