Jerome Powell dampens hopes of a Federal Reserve hub
Hopes for a Fed pivot were dashed by Jerome Powell’s speech last night. Major US indices fell Wednesday night, with the Nasdaq 100 and the Russell 2000 down more than 3% and the Dow Jones down 1.5%.
The central bank chief warned that there remains a great deal of uncertainty about the level of the federal funds rate, which could be higher than what institution officials estimated in September. Jerome Powell also judged “premature” the idea of a pause in monetary policy tightening, dumping the hubs’ hopes.
Powell also made clear that the stakes are not equal. If the Fed does too much, it can always loosen its monetary policy, while if it is not tightened enough, it will have real problems. In other words, the Fed would rather risk doing too much than not enough.
The bond market did not remain indifferent. Long rates rose slightly, but short rates jumped. The two-year US interest rate rose 7 basis points on Wednesday and rose 10 basis points on Thursday. It must be said that market operators are now expecting that the Fed’s final interest rate will remain between 5.00% and 5.25% for a longer period (until November 2023 vs earlier July).
The next major catalyst for Wall Street will be the monthly jobs report on Friday. Creating a much larger number of jobs created would bolster the Fed’s confidence in its ability to tighten monetary policy without causing a recession, which will add to the pressure on the markets.