As a result of testimony given by the Chairman of the Federal Reserve, Jerome Powell, the likelihood of a sizable increase in interest rates has gone up, and more suffering is on the way. During his semiannual congressional testimony on Tuesday, the Chairman of the Federal Reserve adopted a hawkish tone, increasing the likelihood of a larger interest rate in the near future.
According to Powell, the economy has fared better than expected despite rising interest rates, and he signaled that this year’s rate increases would be even more than anticipated. This has led investors to anticipate a larger rate increase at the Fed’s meeting later this month.
Powell stated that the statistics indicate that the eventual level of interest rates would likely be higher than expected. If the facts indicated that a quicker rate of tightening was necessary, they would be willing to increase the pace of rate hikes.
According to Powell, restoring price stability would likely require them to retain a restrictive monetary policy stance for an extended time. The markets responded to the depressing news instantly.
Before Powell’s speech, investors estimated that a 0.5 percentage point increase was likely at the Fed’s meeting this month; approximately 30% predicted this likelihood according to the CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market that the Fed is targeting. They estimate the likelihood of a 0.25 percentage point decrease to be around 70%. When Powell testified, though, the odds changed. As of Tuesday morning, the probability of an increase of 0.5 percentage points jumped to above 66%, while the probability of a smaller increase plummeted to below 34%.
Powell stated on Tuesday that they continue to believe that further increases in the federal funds rate target range would be appropriate to restore inflation to 2% over time.
In January, the economy added 517,000 jobs, exceeding estimates, and the unemployment rate is currently 3.4%, the lowest level since 1969. Recent inflation figures indicate that price rises are not slowing as effectively as desired by the central bank.
Powell has signaled that the job market will need to weaken to reduce inflation, and robust employment data provide the Fed with greater confidence to raise rates even further. After Powell spoke, the Dow Jones Industrial Average fell by 260 points, and the S&P 500 fell by more than 0.9%.
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