Wild Hawk Delivers A Beatdown

After a month of the bond market pricing in the “higher-for-longer” interest rate narrative, someone finally told the stock market.

And that person was Fed Chair Jerome Powell, who gave testimony as part of the Fed’s semiannual monetary policy report to Congress. The following section in Powell’s prepared remarks sent stocks falling and yields rising. 😮

“Although inflation has been moderating in recent months, the process of getting inflation back down to 2 percent has a long way to go and is likely to be bumpy. As I mentioned, the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”

Essentially the recent data, particularly the strength of the labor market and the stickiness of service-sector inflation, caused the Fed to conclude that: 📝

  1. The peak level of interest rates needed to tame inflation will likely be higher than initially anticipated; and
  2. If the data continues to come in strong, it’s open to increasing its pace of rate hikes.

In December, when the Fed last outlined its projections, it thought it would raise rates to between 5% and 5.5% and keep them there through the end of the year. However, the market speculates that the new projections submitted at the March 21-22 meeting could show the Fed anticipating a 5.5% to 6% rate through the end of the year. 🔮

The speculation around how much the Fed will raise rates at the upcoming meeting and what their projections will show continue to drive volatility in the markets. Ultimately, the Fed’s messaging hasn’t changed all the much. However, the market adjusts its expectations wildly with each new economic data point, often leaving it offside when the Fed actually speaks or acts.

We’ll just have to wait and see what the coming weeks bring. In the meantime, the bond market pushed 2-year yields to fresh highs above 5.00% as it anticipates the Fed taking a very hawkish approach at its March meeting. That sent stocks tumbling… 🦅

And while we’re talking about the economy, it’s worth mentioning that Meta is reportedly planning to cut thousands of more workers. Meanwhile, Salesforce CEO Marc Benioff says he was blindsided by the market chaos last year but is bracing for a brutal recession this year. 😨

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International Central Banks Follow Suit

Yesterday the U.S. Federal Reserve raised interest rates by 25 bps and set the stage for ongoing rate increases as it continues to battle inflation. 📰

Today, we heard from the European Central Bank (ECB) and Bank of England (BOE), which also continued tightening. Let’s see what they had to say.

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Banks Pass Fed’s Stress Test

We all have stress in our lives. But according to the Federal Reserve’s annual stress test results, the largest U.S. Banks shouldn’t be one of them. 👍

This test aims to help ensure that large banks can lend to households and businesses even in a severe recession. They were implemented under the Dodd-Frank Act, a response to the 2008 financial crisis that saw the global property market implode and credit markets freeze.

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Just A Minute(s)

The Federal Open Market Committee (FOMC) released the meeting minutes from its January 31 to February 1 meeting, where it raised rates by 25 bps. And while previous minutes had shown most members were on the same page about the policy path, there was some contention in this meeting. ⚔️

Most members stressed that inflation remains well above the long-term 2% target and that ongoing rate increases would be necessary. The ultimate question(s) remains how high do rates need to go to be restrictive, how long will they have to stay there, and what path will the Fed take to get there?

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Fed Cuts Down Bears’ Remaining Hope

We said yesterday that expectations for a dovish Federal Reserve meeting were high. And for now, it appears that Jerome Powell and the FOMC have delivered just that. 🤩

The Federal Open Market Committee (FOMC) statement changed slightly vs. November, primarily adding verbiage that “inflation has eased over the past year” but remains elevated. As such, they kept rates unchanged to close out 2023.

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