[Feature] Powell's Speech Unexpectedly "Hawkish", With a 50 Basis Points Rate Hike in March Exceeding 50% Expectations

Compiled By: Coinlive
Author: BitpushNews

On the morning of March 7th local time, the Chairman of the U.S. Federal Reserve, Powell, delivered his semi-annual monetary policy testimony to the Senate. Powell stated that due to persistent inflation, the Federal Reserve may continue to tighten monetary policy and may do so faster than previously anticipated, which is a surprisingly aggressive stance following last month's slowing of the pace of interest rate hikes.

Powell told the Senate Banking Committee, "Recent economic data have been stronger than expected, indicating that the ultimate level of interest rates may be higher than previously expected. If overall data suggest that a faster tightening of policy is necessary, we are prepared to raise interest rates at a faster pace."

These comments suggest that the Fed may implement a larger rate hike than the 25 basis points last month at its next policy meeting on March 21-22.

According to CME Group's FedWatch tool, following Powell's remarks, traders raised the probability of a 50 basis point hike in March to 51.3%, up significantly from 31.4% a day earlier and 9.2% a month earlier. Previously, the market had widely expected the Fed to maintain its 25 basis point rate hike passed on February 1 and slow down its aggressive rate hikes in 2022.

In addition, traders currently expect the peak of the benchmark interest rate (terminal rate) to reach between 5.5% and 5.75% in the summer. In December's estimate, Fed officials had set the terminal rate at 5.1%.

Key recession indicators flash warning signals
Following Powell's speech, the cryptocurrency and stock markets saw a significant decline, and US Treasury yields soared.

Bitcoin briefly fell by about 1.6% to below $22,000 after the comments were released. It then rebounded slightly to $22,100, while the S&P 500 fell 1.4%.

The U.S. 2-year Treasury yield broke above 5% intraday, reaching its highest level since 2007. The 2-year yield is now more than 100 basis points higher than the 10-year yield for the first time since September 22, 1981, and the last time the 2-year yield was below the 10-year yield was in July of last year. CNBC analysts noted that an inverted yield curve has been an accurate signal of an impending economic recession for half a century.

10-year government bonds usually offer higher returns than short-term bills because investors commit their funds for a longer period of time. Shorter-term U.S. government bonds, such as 2 or 3-year bonds, typically offer lower yields because risks are easier to predict than long-term bonds.

However, when the returns on 10-year government bonds fall below those of 2-year bonds, it indicates that investors are pessimistic about the outlook and unwilling to commit funds.

Economists have long regarded an inverted yield curve as an accurate signal of an impending economic recession. According to research by the Federal Reserve Bank of San Francisco, an inverted yield curve has occurred before every U.S. economic recession since 1955.

Powell says the Fed is "still far" from its inflation-fighting target
The Fed began aggressively raising the federal funds rate a year ago, and rates now range from 4.5% to 4.75%. Nevertheless, the U.S. economy has shown remarkable resilience. In the three months leading up to January, employment increased by over 1 million, and the Fed's preferred inflation gauge, the personal consumption expenditures index, rose 5.4% over the 12 months ending in January. Consumer and inflation data indicate that price pressures continue to persist.

Powell also emphasized that the central bank still has some way to go before declaring victory over inflation.

In his testimony before the Senate, he pointed out that despite the Fed's rate hikes and attempts to cool economic growth, the labor market remains "extremely tight." He said, "We're a long way from our price stability goal, and the actual economic data has exceeded most estimates of maximum employment."

Senate Democrats have been cautious about accelerating rate hikes, with senior Democratic Senator Elizabeth Warren stating in the meeting that if the unemployment rate rises to the Fed's projected 4.6% by the end of the year, 2 million people will lose their jobs. She asked Powell, "How do you justify the need for unemployment?"

Powell argued that all Americans are suffering under the weight of rising prices. Inflation is very high and is seriously hurting the American people.

He responded, "If we were to give up that job and let inflation run at 5-6%, would working people be better off?"

In January 2023, the US added 517,000 jobs in the nonfarm sector, and the unemployment rate was 3.4%, the lowest level in 54 years. The Labor Department is set to release its hiring report for February on Friday and the inflation report for February next week, which will provide guidance for the new monetary policy. Powell said, "We do have a couple of very important data releases before the FOMC meeting, which are really important for us to assess these relatively new data."