(Bloomberg Opinion) — An aggressive warning from Federal Reserve Chairman Jerome Powell that the central bank could accelerate interest rate hikes turned on its head recent Wall Street thinking that inflation would be tamed with stronger measures. modest.
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Treasuries plunged to new lows after Powell said in prepared remarks that to combat persistent inflation, the Fed was “prepared to increase the pace of rate hikes” and that the terminal rate “is likely to be higher than the anticipated”. Swap bets changed to show that traders now expect the Fed to be slightly more likely to announce a half-point hike rather than a quarter-point move at its March meeting. The S&P 500 Index fell nearly 1% before paring losses.
“They’ve only gone up 25bp once, if they go back to 50, who’s to say they’re not going to 75?” said Lindsay Rosner, multi-sector portfolio manager at PGIM Fixed Income. “The idea that we are in a lower step function, this is definitely throwing water on it.”
Here’s what others on Wall Street were saying:
Ian Lyngen of BMO Capital Markets:
“Powell’s prepared text was aggressively skewed (more than we anticipated) with comments that the Fed is ‘prepared to increase the pace of hikes if necessary’ and that ‘the final rate spike is likely to be longer. higher than expected’. He went on to point out that decisions will be made ‘meeting by meeting’”.
“The president also noted that the breadth of the revisions to previous quarters suggests that inflation is rising.”
Steve Sosnick, Chief Strategist at Interactive Brokers:
“Goldilocks came out swinging.”
“These comments are completely in line with a data-dependent Fed. All major measures of inflation in February were higher than in January and above expectations. Meanwhile, the other economic reports were generally positive, especially when it came to employment. In that sense, if he hadn’t taken a hawkish tone on rates, we would have been rightly concerned.”
Michael Antonelli, Baird’s Market Strategist:
“The market hates when interest rate rises are higher than expected or faster than expected. Investors are trying to decide where the Fed’s terminal rate will be, so that is moving projections higher, putting a headwind in stocks and making each rally look more shaky.
Simon Harvey, Head of Currency Research at Monex Europe Ltd.:
“Powell has finally relinquished control of financial markets after repeated attempts to get them to bow to the Fed’s message. By keeping the door open for a re-acceleration in the Fed’s hike cycle, which we didn’t expect because such action does not build confidence in the Fed’s control of inflation, Powell is letting the financial markets do his dirty work for him.”
Randy Frederick, vice president of trading and derivatives at Charles Schwab Corp.:
“We’ve seen this story time and time again: Although the Federal Reserve has been continuously aggressive, there have been many cases where the market stopped believing in the Federal Reserve, the Federal Reserve is aggressive, and then the markets go lower again. It is a constant repetition. All this can change if we receive an amazing labor report this week.
Max Gokhman, director of investment strategy for MosaiQ at Franklin Templeton Investment Solutions:
Although Powell just underlined what we already highlighted about the surprising resistance seen in the latest data, rate traders were somewhat surprised by his outspokenness and began pricing in a 50bp hike for March, which then generated concern in the rest of the markets”.
Michael O’Rourke, Chief Market Strategist at Jonestrading:
“Down 1% really isn’t a meaningful move when we were up 1.6% on Friday with no major news. All that we are witnessing today and the last few days is just noise. Policy is still too loose and financial conditions are historically ‘average’, not tight.”
Ashish Chugh, money manager at Loomis Sayles & Co., on emerging markets:
“Higher US rates and a stronger dollar have generally not been good for emerging markets, but I think we’re in a different regime this time. In emerging markets, the tightening cycle is closer to its end as inflation is declining in emerging markets.
Timothy Chubb, chief investment officer at Girard, a Wealth Division of Univest:
“At the end of the day, we are skeptical of people who argue that inflation hasn’t peaked yet. There hasn’t been enough data to suggest the Fed would have to go as far as raising interest rates by 50 basis points at its next meeting just because of the recent inflation data. We have to see a quarter of the numbers to put pressure on the Fed to do that. A month does not make a trend ”.
–With the assistance of Sydney Maki, Elena Popina and Srinivasan Sivabalan.
(Adds comments from O’Rourke, Chugh)
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