Well, that was short and direct. Especially for the Federal Reserve.
In a speech of less than 10 minutes Fed chair Jerome Powell warned financial markets to expect that the central bank will keep raising interest rates and will then leave them at higher levels for some time in order to control inflation.
Speaking at the Kansas City Fed’s annual policy forum in Jackson Hole, Wyoming, on Friday morning, August 26, Powell warned that “restoring price stability will likely require maintaining a restrictive policy stance for some time.” And the markets shouldn’t expect a quick shift toward a looser monetary stance. “The historical record cautions strongly against prematurely loosening policy.”
“This was a very clear pushback on market expectations of a pivot from the Fed in 2023,” Brian Coulton, chief economist at Fitch Ratings, told Bloomberg. “This means taking rates above neutral through more outsize hikes in coming meetings and then holding them there for some time–likely through the whole of next year.” An end-of-the-year 4% level for the Fed’s benchmark is now on the table.
It’s that “whole of next year” thing that goes against the grain of the recent Wall Street consensus. Investors and traders have come to believe in recent weeks that the Fed would end its aggressive interest rate increases in early 2023 and then move relatively quickly to cutting interest rates in order to stave off a recession.
Powell’s remarks today were a clear rebuttal to that view.
After some indecision from stocks, the major indexes moved decisively lower with the Standard & Poor’s 500 down 3.37% at the close and the Dow Jones Industrial Average off 3.03%. The NASDAQ Composite fell 4.10% and the small-cap Russell 2000 was lower by 3.30%.
The CBOE Fed Watch Tool, which calculates the odds of a Fed move by looking at prices in the Fed Funds Futures market, showed a definite move toward a belief in a higher interest rate by the end of 2022. As of 3 p.m. New York time, the odds of a 75 basis point increase at the September 21 meeting rose to 60.5% from 41.2% a month ago on July 26. Odds of a 50 basis point increase at the November meeting climbed to 48.5% from 16.8% a month ago. The odds that the Fed’s benchmark interest rate would hit 3.75% to 4.0% at the December 14 meeting rose to 41.5% from just 9.2% on July 26th.
Bond prices and yields didn’t shift dramatically with the yield of the 10-year Treasury steady at 3.02% and the yield on the interest-rate sensitive 2-year Treasury at 3.308%, up just 1 basis point from yesterday’s yield.
Higher interest rates for longer means a stronger dollar. The Invesco DB US Dollar Index Bullish Fund (UUP) was up 0.38% as of 3 p.m. today. That ETF is up 0.87% since I added it to my Jubak Picks Portfolio on July 12, 2022.
