Jerome Powell, chairman of the US Federal Reserve System (Fed), suggested that the Fed may turn to the big step (0.5 percentage point rate hike) again in March, and that the final interest rate may also be higher than previously expected. When the possibility of a 6% interest rate was raised in Powell’s remarks, which returned to his “hawkish nature,” the spread of the US short- and long-term interest rate differential widened to the largest extent in 42 years, spreading fears of an economic recession as well, and the global financial market fell into a panic.
Chairman Powell attended a hearing on the US Senate Banking Committee on the 7th (local time) and read a statement he prepared in advance before asking questions from lawmakers. It suggests that,” he said. “We are prepared to increase the pace of interest rate hikes further if the overall economic indicators suggest that more rapid tightening is needed,” he said. In terms of ‘core service prices’, excluding energy, food, and housing costs, “disinflation (a decline in the rate of inflation) is not seen at all.”
Chairman Powell’s prepared remarks turned the global financial market into chaos. According to the Chicago Mercantile Exchange’s FedWatch, interest rate futures investors raised the possibility of the Fed’s big step from the previous 30% level to 70% at the Federal Open Market Committee (FOMC) meeting held on the 21st and 22nd of this month. The Fed has returned from the giant step (0.75% point) four times in a row since June of last year and the big step in December to the normal speed of the baby step (0.25% point) in February this year. However, the possibility of a big step turn has become strong due to the hot employment indicators in the US and signs of a rebound in inflation.
In addition, the market, which predicted that the Fed would raise the final interest rate this year from the current 4.5-4.75% to 5.25-5.5%, raised it to 5.5-5.75% after Powell’s remarks. On this day, Goldman Sachs raised its final interest rate forecast to 5.5-5.7%, and BlackRock and Schroders put weight on the fact that it will rise to the 6% range. The possibility of realizing an interest rate of 6%, which was considered an impossible figure, has increased. Chairman Powell emphasized in a Q&A with lawmakers that day, “It will be higher than the previous dot plot forecast (median value 5.0-5.25%).”
The market is paying attention to the February U.S. employment report to be announced on the 10th and the rise in the consumer price index (CPI) for February on the 14th, as Chairman Powell announced that he would make a judgment based on ‘the totality of the data’. If the two key indicators are higher than expected, it is highly likely that the FOMC will come out with a more hawkish rate forecast in March.
The three major indices in the US New York stock market fell all at once due to the Fed chairman’s return to high-intensity tightening and the final interest rate surge signal. In particular, the Dow Jones Industrial Average fell 1.72% to close at 32,856.46, turning negative, a total decline of 0.9% this year.
In particular, the bond market, which is sensitive to the Fed rate, was shaken even more sharply. The 2-year US Treasury yield exceeded 5% for the first time in 16 years, while the 10-year Treasury bond yield remained at 3.9%, widening the yield curve by 1 percentage point for the first time in 42 years since 1981. An inverted yield curve has been interpreted as a precursor to a recession.
Another precursor to fears of a recession is falling oil prices. On the same day, West Texas Intermediate (WTI) for April delivery plunged 3.6% per barrel on the New York Mercantile Exchange (NYMEX), and Brent crude oil for May delivery on the London ICE Futures Exchange also fell 3.4%. It is analyzed that despite China’s reopening, China’s demand recovery fell short of expectations, including a 10.2% drop in imports in January and February, and the US Federal Reserve strongly hinted at an intensive tightening turn. “We are preparing for a recession because of the traumatic level of inflation,” said Ken Griffin, CEO of Citadel, a huge hedge fund company, in an interview with Bloomberg TV that day.
Meanwhile, Democratic Senator Elizabeth Warren, who has criticized Powell at the hearing, said, “If you raise interest rates and increase unemployment, millions of workers will suffer. When pushed to say, “Tell them what to say,” Chairman Powell responded by saying, “If we let go of our mandate for price stability, then will they benefit more?” Some lawmakers also pointed out that inflation caused by supply chain problems, such as the war in Ukraine, can only be raised by raising interest rates. In response, Rep. Powell said, “In the early stages of the rise in inflation, the supply chain factor was large, but recently the factor of imbalance between supply and demand has become more prominent. “While the Fed’s price stabilization tools are limited, we will do our part to balance supply and demand.”
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Source: Donga
Mark Jones is a world traveler and journalist for News Rebeat. With a curious mind and a love of adventure, Mark brings a unique perspective to the latest global events and provides in-depth and thought-provoking coverage of the world at large.