Powell Stays Hawkish As Fed Prepares For Another Rate Hike This Year

Key Insights

• The Fed remains committed to its 2% inflation target. 
• Powell noted that the Fed would likely raise rates somewhat further by the end of the year. 
• Traders believe that federal funds rate would peak at 525 – 550 bps. 

On June 21, Jerome Powell presented the Fed’s semiannual Monetary Policy Report to the Congress.

In his prepared remarks, Powell highlighted that Fed remained strongly committed to bringing inflation back down to the 2% goal. According to Powell, the process of getting inflation back down to 2% has a long way to go.

Powell noted that nearly all FOMC participants expected that it would be appropriate to raise interest rates somewhat further by the end of the year. Powell also said that the speed of the rate hikes was not too important now so the Fed had an opportunity to pause at the June meeting.

The FedWatch Tool indicates that there is a 79.4% probability that Fed would raise the federal funds rate by 25 bps at the next meeting in July. After this hike, the federal funds rate is expected to remain at the 525 – 550 bps level until the ned of the year. Traders do not believe that the Fed would be able to raise the federal funds rate to 550 – 575 bps.

Treasury yields continued to move higher as bond traders prepared for another rate hike. The market expects that rates will stay at high levels until the end of the year, and it’s not surprising to see that bond traders bet on higher yields.

SP500 is losing ground as traders focus on rising Treasury yields. NASDAQ is down by 1% as traders take profits after the recent rally.

U.S. Dollar Index is moving lower despite rising yields. It looks that Powell did not sound too hawkish for forex traders.

Gold remains under pressure amid a broad sell-off in precious metals markets, while silver is down by 2%. Traders prepare for the high interest rate environment until the end of the year, which is bearish for precious metals that pay no interest.

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