2 things to focus on during Powell’s testimony

The Fed Chair Powell testifies today before the Senate Banking Committee in Washington, DC. He’ll talk about the current monetary policy and what the Federal Reserve plans to do next.

A semi-annual event, the testimony matters to markets. Today’s testimony is significant because the markets have gone nowhere lately, looking for more clues from the Fed.

So today, the focus is on Powell and what he will say. Here are two things to focus on:

• Will Powell set the stage for a 50bp rate hike?
• How will interest rate expectations move?

Will the Fed raise rates by 50bp next?

The Fed’s tightening cycle is about capping inflation. But unfortunately, global inflation is still hard to control after the pandemic, even in the world’s largest economy.

Central banks struggle as inflation and inflation expectations remain more elevated than expected. However, what the Fed faces is common to all central banks in advanced economies.

Let us have a look only at what happened in 2023. Several things highlight the challenges lying ahead.

First, January CPI or Consumer Price Index data came out above expectations. Second, the PPI or Producers Price Index exceeded expectations too.

Moreover, the Core PCE Price Index, the Fed’s favorite measure of inflation, rose in January for the first time since October 2022. Furthermore, December and November CPI data were revised higher.

Therefore, Powell has all he needs to set the stage for a 50bp rate hike next. After all, the last time he spoke, he promised that the Fed would need to raise rates more if inflation data would come in stronger than expected.

It did.

How about interest rate expectations?

They are up huge.

The market has now priced in about a 30% chance of a 50bp rate hike at the next Fed meeting. It is huge because only one month ago, the chances that the Fed would hike by 50bp were only 1%.

Finally, the chances of the funds rate exceeding 6% are 14%.

To sum up, today’s Powell testimony matters for financial markets. Given the latest inflation data, the US dollar bulls should be in the driving seat.