Powell Surprises Markets With Plans For Higher Interest Rates

Key Insights

• Fed Chair Powell says higher rates needed to fight inflation. 
• The Fed is prepared to move in larger steps if necessary. 
• Peak level of the federal funds rate will be higher than previously expected.

Powell’s Hawkish Comments Shock Markets

On March 7, traders focused on Fed Chair Powell’s comments before the Senate Banking Committee.

In his prepared testimony, Powell said that the Fed would have to raise interest rates to higher levels if the economic data was strong. In addition, he noted that Fed was prepared to move in larger steps if it believed that such measures were necessary to fight inflation.

Powell noted that recent economic data was stronger than previously expected. Thus, the peak level of the federal funds rate should be higher than previously expected.

According to the FedWatch Tool, traders expect that  federal funds rate would peak at 550 – 575 bps in 2023, compared to the current level of 450-475 bps. Powell’s remarks have clearly surprised markets, and traders have started to evaluate a possibility of a 6% rate in 2023.

Interestingly, the FedWatch Tool indicates that there is a 0.2% probability of a 625 – 650 bps rate in December 2023, which shows that some traders are ready to bet on extreme scenarios.

S&P 500 Dives As Traders Prepare For Higher Rates

S&P 500 pulled back towards the 4000 level as traders reacted to Powell’s comments. The FedWatchTool shows that there is an almost 50% probability of a 50 bps rate hike, which is bearish for stocks.

Not surprisingly, Treasury yields moved higher after Powell’s comments. Higher Treasury yields provided material support to the U.S. dollar. The U.S. Dollar Index, which measures the strength of the U.S. dollar against a broad basket of currencies, climbed back above the 105 level.

Gold and other precious metals found themselves under strong pressure as traders prepared for additional rate hikes. Gold declined towards the $1820 level, while silver pulled back below $20.50.

For a look at all of today’s economic events, check out our economic calendar.