Dow Falls 400 Points As Fed Chair Powell Warns More Severe Rate Hikes On Deck

Topline

In a semiannual report to Congress beginning Tuesday at 10 a.m., Federal Reserve Chair Jerome Powell struck a more hawkish tune than expected, saying the central bank will continue to up the temperature on what is already their most aggressive tightening campaign in decades.

Powell takes the stand Tuesday.

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Key Facts

Powell’s testimony to the Senate’s banking, housing and urban affairs committee was more hawkish than expected, as the central bank head honcho defended the Fed’s decision to hike interest rates to a 16-year high in order to combat inflation — and said more aggressive monetary policy is on the table.

“We will stay the course until the job is done,” Powell said in prepared remarks, saying the Fed is willing to maintain a “faster” pace of rate hikes than previously expected.

Stocks slid soon after Powell took the stand and added to losses as the session continued, with the Dow Jones Industrial Average falling 400 points, or 1%, by noon, while the S&P 500 and tech-heavy Nasdaq shed 1.1% and 0.8%, respectively.

It’s the Dow’s third-worst day of 2023.

The target federal funds rate, which determines the lending rate between banks and strongly influences borrowing costs nationwide, was 4.5% to 4.75% on Tuesday, with yet another increase expected later this month.

The peak funds rate “may well be higher” than previously shared, Powell said, adding inflation is “nowhere” near his desired level.

Crucial Quote

“I don’t think anybody knows with confidence how this is going to play out,” Powell said Tuesday.

What To Watch For

Powell’s report to Congress continues on Wednesday, when he testifies before the House.

What We Don’t Know

It’s unclear when the Fed will stop raising rates, but analysts at Goldman Sachs and Bank of America added another rate hike to their forecasts after a hotter-than-expected inflation reading last month. They now expect the central bank will raise rates to a top level of 5.5%, which would mark the highest level since the turn of the millennium. “Markets are admitting the Fed may not be close to done,” Sevens Report founder Tom Essaye told clients in a note of the stock market’s recent weakness.

Surprising Fact

The futures market now prices a 50 basis-point hike to the federal funds rate as the most likely outcome following the Fed’s March 22 meeting, according to the CME FedWatch Tool. The Fed last hiked rates by 25 basis points.

Chief Critic

“Chair Powell, if you could speak directly to the two million hard-working people who have decent jobs today who you’re planning to get fired over the next year, what would you say to them?” Sen. Elizabeth Warren asked during the hearing Tuesday, questioning the Fed’s view that a higher unemployment rate is a necessary condition to bring down inflation.