Federal Reserve chief Jerome Powell signaled on Wednesday that the interest rate in March was “appropriate”, but stressed that the impact of the Russian invasion of Ukraine was incredible. Following the publication of Powell’s prepared testimony, stock market futures gave up some early gains.
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“The short-term consequences for the US economy of the invasion of Ukraine, the ongoing war, sanctions and the upcoming events remain very uncertain,” Powell told lawmakers at a hearing at 10 a.m. “We will have to be agile in responding to input and changing perspectives.”
With inflation already so hot and the Federal Reserve so behind the curve, Wall Street is concerned that politicians may have no choice but to not only continue to tighten rapidly, but also potentially increase the rate of interest rate hikes. It is unclear to what extent Powell’s prepared testimony will allay this concern, although he will set it out in more detail in a question and answer session.
The events so far, which have led to a jump in commodity prices and caused a correction in the stock market, have not changed Powell’s melody much. His testimony did not mention lower asset prices, but noted that “the labor market is extremely tight”.
“We are wary of the risk of potential further pressures on inflation expectations and inflation itself from a number of factors.”
Powell said he expects the Fed’s base rate hike to be appropriate at the March 15-16 meeting. “The reduction in our balance sheet will begin once the process of raising interest rates begins,” he added.
Federal Reserve reaction: Ukraine against Omicron
Vladimir Putin’s invasion of Russia is just the latest recent inflation curve for the Fed, following the delta and omicron variants. Still, the options were radically different. While tackling economic growth by slowing the recovery of the services sector, they also stimulated wage growth by shrinking the number of potential workers through early retirement, a series of absences and complications in raising children.
This latest crisis, from an economic point of view, is associated with rising prices, which will slow growth to some extent by reducing purchasing power and potentially undermining demand. In that sense, it’s more of a pure negative that the Fed can usually wait for. But if wage growth remains hot, Fed politicians may decide they don’t have the patience.
“The Fed tends to look beyond higher food and energy prices driven by geopolitical events, and we think it would be forced to rise more aggressively only if it sees signs of a spiral in wages and prices, which is not the case at the moment. “Solita Marcelli, America’s chief investment officer at UBS Global Wealth Management, wrote on Monday.
Powell’s focus on tight labor markets could shape Wall Street’s response to Friday’s job report.
Economists expect Friday’s job report to show the addition of 390,000 jobs in February, as the unemployment rate fell back to 3.9% after rising to 4% in January.
However, there is one thing in the Jobs Report that may be really good news for the markets: increasing labor force participation with the withdrawal of the pandemic.
Stock market, action for the profitability of the treasury
The higher risk of disruption of supplies of key goods, following the escalation of sanctions against Russia over the weekend, caused a new decline in the stock market on Monday and Tuesday. Crude futures rose another 8 percent to $ 112 a barrel on Wednesday, but major stock indexes were poised to rebound earlier.
But the rebound lost momentum after Powell’s remarks were made. Dow Jones futures increased by 0.35%, S&P 500 futures by 0.3% and Nasdaq 100 futures by 0.2%.
The Dow Jones industrial average closed 9.5 percent of its record high on Tuesday. The S&P 500 is 10.2% below its record close, while the Nasdaq is down 15.7% from its peak.
After falling on Tuesday, government bond yields jumped on Wednesday. Following Powell’s testimony, 10-year bond yields rose 6 basis points to 1.77%, while 2-year yields rose 11 basis points to 1.42%.
FedWatch’s CME Group page currently shows a 90% chance of a quarter-point increase at this month’s Fed meeting and a 10% chance of a half-point increase.
There are currently five interest rate hikes on Wall Street in 2022, raising the Fed’s key interest rate to 1.25% -1.5%. On top of that, the Fed laid the groundwork for a partial reversal of its $ 4.5 trillion asset purchases from the Covid era.
Be sure to read the IBD Daily Big Picture column to get the latest on the main market trend and what it means for your business decisions.
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Russia’s invasion of Ukraine poses major economic risks
Futures are rising slightly, crude oil is rising; The head of the Fed Powell sees an increase in interest rates in March