Powell is committed to March’s 50 basis point hike
- Fed Chairman Jerome Powell acknowledged that the pace of a quarter-point rate hike is not fixed and that faster rate tightening could be justified if economic data confirms it.
- Powell’s follow-up testimony tomorrow will be his last scheduled public speech on interest rate policy ahead of the next Fed meeting on March 21-22.
- Strong economic data has changed investor expectations for rates, and the rate is now expected to rise to around 5.5% by mid-year and remain at that level in 2023.
This morning, Federal Reserve Chairman Jerome Powell acknowledged during his Capitol hearing that the recent pace of the 25 basis point interest rate hike is not set in stone. Powell expressed confidence that strong and sustained economic activity this year could spur central bank officials to speed up interest rate hikes. He also said it could lead to larger rate hikes than originally expected to fight high inflation.
Powell’s comments were prepared for submission to the Senate Banking Committee. He pointed out that the latest economic data was stronger than expected, which means that the final level of interest rates is likely to be higher than expected. In a similar vein, Powell explained that the Fed would be ready to accelerate the pace of rate hikes if the data indicated a need for faster tightening.
Powell also said that the process of bringing inflation down to 2% has a long way to go and is likely to be bumpy. Although inflation has slowed in recent months, Powell said the Fed will continue to make decisions from meeting to meeting.
Economic data
Since the last Fed meeting in February, several economic reports have shown that hiring, spending and inflation have been higher than expected. The data revision also showed that inflation and labor demand did not slow down as much as originally forecast. Powell explained that the magnitude of the reversal, along with the previous quarter’s revision, suggests that inflationary pressures are higher than originally expected.
Powell said the Fed was trying to rein in investment, spending and hiring by raising rates. This makes borrowing more expensive and can reduce the value of risky assets such as stocks and real estate.
Powell’s testimony this week is his last scheduled public appearance on interest rate politics. Thus, this is the last chance to form market expectations ahead of the next Fed meeting on March 21-22. Officials will begin a period of silence before the meeting on Saturday.
Notably, Powell may face restrictions guiding markets beyond this week as two widely popular economic reports are expected to be released after his speech and before the next Fed meeting that could influence officials’ discussion, Friday’s NFP report and CPI report. next week.
50 basis points on the table?
Several Fed officials have indicated in recent weeks that they may raise rates more this year than originally expected. The presidents of the three regional federal banks said they could support a larger half-point increase last month or do so at the next meeting.
Recent strong economic data has changed investor expectations for interest rates. At the last Fed meeting, investors in the interest rate futures markets expected officials to raise the federal funds rate again this year to a high of 4.9% and start cutting it this fall.
According to CME’s FedWatch tool, investors are currently pricing a 60/40 plan for a 50 basis point rate hike within two weeks, and those rates could peak above 5.5%.
Source: WEC FedWatch.
Technical Analysis – GBP/USD Testing 2023 Lows
Not surprisingly, the US dollar has benefited from the interpretation of Powell’s “higher interest rates for the longer term” comments. GBP/USD in particular is lower today as the pair broke previous support around 1.1900 to test a yearly low.
Source: StoneX, Tradingview
A close below the Jan 6 low near 1.1840 will open the door for further decline to a 38.2% rally from all-time low near 1.1640. At this point, only a close above 1.1900 would remove the near-term bearish bias.
Matt Weller, CFA, CMT, FOREX.com » Official site
Matt Weller is Head of Global Market Research for FOREX.com and City Index. In his research, Matt uses a combination of fundamental, technical and sentiment analysis to anticipate possible market movements. His analytics are published regularly in the Financial Times, Reuters, MarketWatch and the Wall Street Journal. Matt is a Certified Financial Analyst (CFA) and Certified Market Specialist (CMT) license.
Disclaimer: The information and opinions contained in this report are for general information only and do not constitute an offer or solicitation to buy or sell any currency contracts or CFDs. Although the information contained herein has been obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness and accepts no liability for any direct, indirect or consequential damages that may result from anyone relying to such information.