Dow slumps 500 points as 2-year-yield tops 5%, dollar soars
U.S. stocks and other financial markets were jolted Tuesday as Federal Reserve Chair Jerome Powell made clear interest rates would rise further than policy makers previously expected, and opened the door wide open to speeding up rate hikes if the data warrants it.
"Jay Powell pulled no punches when it came to the Fed's first priority to get inflation under control, and to go as far and as fast with rates as those numbers required," said Danni Hewson, head of financial analysis at U.K. broker AJ Bell, in emailed comments.
The main event was a surge in the policy sensitive 2-year Treasury yield , which jumped nearly 12 basis points and topped 5% for the first time since 2007. Yields and debt prices move opposite each other.
The move came as fed-funds futures showed that traders now see a more-than-60% chance that policy makers will lift the benchmark interest rate by 50 basis points or half a percentage point, at the end of the next Fed meeting on March 22. That's up from around 34% on Monday and 9% a month ago, according to the CME FedWatch tool.
The surge in the 2-year yield led the dollar higher versus major rivals, lifting the ICE U.S. Dollar Index by 1.2% to its highest since Jan. 6.
Gold slumped in response to rising yields and a stronger dollar. And equities dropped, with the Dow Jones Industrial Average ending with a loss of 574.98 points, or 1.7%, while the S&P 500 slid 1.5% and the Nasdaq Composite dropped 1.3%.
"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," Powell said, in his prepared testimony before the Senate Banking Committee.
Later, in the question-and-answer session with lawmakers, Powell noted that policy makers "have two or three more very important data releases to analyze before the time of the FOMC meeting," referring to the policy-setting Federal Open Market Committee.
Analysts said Powell left little room for interpretation.
"To summarize his speech in one sentence: a 50 basis point hike in March is on the table," said Daniel Berkowitz, investment director for investment manager Prudent Management Associates, in a note.
While markets are still somewhat split on the magnitude of the next rate hike per data from CME FedWatch, this morning's comments make clearer that regardless of the next increase, the likelihood of a Fed policy pivot has been pushed further down the road.
When it comes to major data releases, the February jobs report is set for Friday. Economists surveyed by The Wall Street Journal, on average, look for the economy to have added 225,000 jobs, slowing from a blowout 517,000 increase in January that helped set in motion a market repricing of rate-hike expectations.
"The seemingly unwavering strength of the job market, we believe, has heightened the Fed's fears of inflation embedding into the economy," said Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management Company, in emailed comments. "As such, we believe members of the Fed will be willing to set aside positive trends on prices and continue to raise rates until it sees what it interprets as meaningful signs that the labor market is faltering,"
"The Fed's insistence on focusing on this lagging indicator is why we continue to view a recession as the likely outcome in the months or quarters ahead," he said. Though the relative financial strength of consumers and businesses means a downturn will likely be "shallow, short and uneven."
In addition to the February jobs report on Friday, investors next week will see the February readings for the consumer-price index and the producer-price index.
A half percentage point interest rate hike isn't written in stone, said Andrew Hunter, deputy U.S. chief economist at Capital Economics, in a note.
The decision "is likely to hinge on the strength of the February employment and CPI inflation data. If, as we expect, the January surge in payrolls proves to be a blip (we're forecasting a 200,000 gain in February) and the earlier downward pressure on core inflation re-emerges, another 25bp still looks more likely," he wrote.
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