Stocks Down On Mr. Powell's Comments On Interest Rates  Image: Bigstock Stocks closed lower yesterday after Fed Chair, Jerome Powell's comments on how high interest rates may go. Mr. Powell, in his semiannual testimony on Monetary Policy before the U.S. Senate Committee on Banking, Housing, and Urban Affairs yesterday morning, said that due to the latest stronger than expected economic data, "the ultimate level of interest rates is likely to be higher than previously anticipated."
He further went on to say that, "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." And those comments sent stocks lower. For much of last year, the Fed had been hinting that the terminal rate was likely to hit 4.6%, and stay there for awhile. But then on December 14, they increased their forecast to 5.1%. Now the Fed has seemingly raised their terminal rate forecast yet again. They did not put a number on what "higher than previously expected" means. But some have been speculating (such as Goldman Sachs), that the Fed would get to a range of 5.25%-5.50% (midpoint of 5.38%), before calling it quits. That comes in stark contrast to the 4.75%-5.00% range (4.88% midpoint), that Fed Funds traders had been pricing in up until just a few weeks ago. With the midpoint currently at 4.63%, that would have required just one more 25 bps rate hike. To get to the Fed's previous estimate of 5.1%, that would have required two 25 bps hikes. But now we're talking about three hikes (or more). But it would seem as if even that calculation could be off. And we could be looking at a 50 bps hike at the next FOMC announcement on March 22. The Fed has repeatedly said they will be data dependent with their decisions. So you can be sure they will be eyeballing Friday's Employment Situation report, not to mention next week's CPI and PPI inflation reports. Mr. Powell will speak to Congress again today, this time giving his semiannual testimony to the U.S. House Financial Services Committee. In other news, Wholesale Inventories yesterday came in as expected, declining -0.4% m/m vs. last month's 0.1%. And Consumer Credit came in at $14.8 billion, which was less than the consensus, but above last month's downwardly revised $10.6B. Today we'll get another look at the economy with MBA Mortgage Applications, the International Trade in Goods and Services report, the ADP Employment Report, the Job Openings and Labor Turnover Survey report (or JOLTS for short), and the Beige Book report. It's unlikely Mr. Powell will move the market with any new surprising remarks today, as his testimony will likely be a rehash of yesterday's testimony to the Senate. But you never know.
I would still expect more volatility ahead of Friday's jobs report, and next week's inflation reports.
In the meantime, the economy still looks good, i.e., slowing but still resilient. And the market, in spite of yesterday's pullback (and really, the pullback since their early-February highs), still looks good. We'll see if the market can regroup and get back on the plus side today/this week. See you tomorrow,  Kevin Matras
Executive Vice President, Zacks Investment Research | 
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