Powell-Pivot Hopes Were Premature

Alexandra Semenova |

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U.S. stocks fell as Wall Street reeled from assertions by Federal Reserve Chair Jerome Powell that hopes for a policy pivot were “premature” after the central bank delivered a fourth consecutive interest rate hike of 75 basis points. Meanwhile, Treasury yields ascended, with the key 10-year note inching toward 4.2%, and the rate-sensitive 2-year yield above 4.7%. The U.S. dollar index also moved higher. The S&P 500's 2.5% loss marked its 54th decline of 1% or more in 2022 — the worst downside volatility since 2009. U.S. investors also had their attention on action across the Atlantic, with the Bank of England following suit on the Fed's move, also raising interest rates by three quarters of a percentage point. Wednesday’s increase brings the Fed’s benchmark policy rate, the federal funds rate, to a new range of 3.75% to 4%, its highest level since 2008. Although the move came in line with expectations, stocks sank after Powell indicated officials may lift interest rates above the 4.6% previously estimated – signaling further tightening is certain, even after the policy statement implied hikes may be smaller in size. The market initially viewed the November Federal Open Market Committee (FOMC) statement as dovish, but a hawkish press conference caused almost a full reversal of these moves due to comments that the “ultimate level of interest rates will be higher than previously expected” and it is “premature to think about pausing rate hikes." The FOMC’s statement also acknowledged the lagged effects of cumulative monetary tightening, suggesting heightened attention by the rate-setting group to concerns over economic growth. In its effort to fight inflation, Powell announced that the Federal Reserve is raising interest rates by three-quarters of a percentage point, the sixth interest rate increase this year and the fourth time in a row at rates this high. Powell also said in his speech that “the labor market continues to be out of balance, with demand substantially exceeding the supply of available workers.”