Joe Walsh

Stock market eagerly awaits Fed Chair Jerome Powell’s testimony

Updated 8:45 AM ET, Tue Mar 7, 2023

Here are three things to watch for in Fed Chair Jerome Powell’s testimony: The state of the economy Is the US economy heading towards a recession or not? It’s the question on most economists’ and investors’ minds. The economy has become seemingly impervious to a string of large interest rate hikes by the Fed, and investors are waiting to see how much longer it can hold up. So how will Powell answer questions about something that defies “simple” explanation? We’ll soon find out. Rate hikes The most pressing piece of information investors are looking for is how high the Federal Reserve will hike interest rates later this month and whether central bank officials expect to pivot away from their painful interest rate increases in the near future. Former Treasury Secretary Larry Summers said on CNN Monday that the Fed will likely have to return to larger rate hikes to stave off inflation as the economy continues to grow. He said his best guess would be for the fed funds rate to rise from its current range (4.5% to 4.75%) to 5.5%, but noted he “wouldn’t be amazed” if it were to hit 6%, given the uncertainties in the economy. San Francisco Federal Reserve President Mary Daly also said recently she believes there’s more work to do to bring down inflation. Will Powell join in and signal that more rate hikes are on the way? Inflation goals The United States is still a long way off from the Federal Reserve’s 2% inflation goal and economists have warned that it could take years to get there. The stickiness of inflation has caused some economists to question whether 2% is still the correct goal. Powell has been steadfast in his devotion to that goal — but expect some lawmakers this week to question him on whether he’d accept potentially sinking the stock market or tanking the economy to get there. JPMorgan Chase CEO Jamie Dimon, who is fond of reporting the economic weather, is also baffled by the state of the US economy. When asked about his economic outlook by Bloomberg Television in an interview Monday, he presented a menu of options. “We could still have a soft landing,” he said. “A mild recession is possible, a harder recession is possible,” he said. The remarks seem to hit the nose of the general economic outlook. Economists, business leaders, investors and even Fed officials aren’t really sure about what’s happening. Even the Oracle of Omaha himself, Warren Buffett, recently wrote in his annual letter to Berkshire Hathaway shareholders that he and business partner Charlie Munger “firmly believe that near-term economic and market forecasts are worse than useless.” Stocks: US stock futures were relatively flat ahead of a consequential hearing at which Fed Chair Jerome Powell is set to testify. Dow futures were up 10 points. S&P 500 futures rose 0.2%. Nasdaq Composite futures were 0.3% higher.   Fear & Greed Index: 54 = Neutral  Oil & gas: US oil prices were down 0.2% to $80 a barrel. Average US gas prices rose to $3.42 a gallon.  This time last year, Federal Reserve Chair Jerome Powell’s congressional address came on the heels of Russia’s invasion of Ukraine, surging gas prices and a significant escalation in US inflation. The economy continuing to rebound and repair itself from the lingering effects of the pandemic — including the disruptions of the Omicron variant. Faced with a strong labor market, uncertain geopolitical developments and surging inflation, Powell told members of Congress then that he’d likely propose a quarter-point rate hike at the central bank’s forthcoming meeting — which he did. And then some. Since then, the central bank has hiked its benchmark interest rate eight times, bringing borrowing rates from almost zero to a range of 4.5%-4.75%. Yet inflation remains a problem. There are signals that some inflationary pressures have eased, however: China’s economic growth was recently downgraded; and supply chain disruptions are easing, the Federal Reserve Bank of New York reported Monday.  The markets are currently expecting the Federal Reserve to make another quarter-point rate hike during its next meeting two weeks from now, with the CME FedWatch Tool showing a 69.4% probability of such a hike. However, the perceived chances of a half-point increase (at 30.6%) have grown considerably during the past few weeks. One month ago, the probability for a half-point increase was 3.3%, according to the CME FedWatch Tool. Still, several major pieces of economic data — including the latest labor turnover report, monthly jobs report, Consumer Price Index, Producer Price Index, and retail sales — are all due ahead of the Fed’s next policymaking meeting on March 21-22. Federal Reserve Chair Jerome Powell is set to appear before the Senate Banking Committee Tuesday to deliver the first part of his two-day semiannual monetary policy testimony before Congress. Powell is expected to speak about the progress the central bank has made in its yearlong campaign to rein in high inflation by ratcheting up its benchmark interest rate from near zero to between 4.5% to 4.75%.  He will likely tout that inflation has slowed in recent months, measuring 6.4% in January after hitting a 40-year high of 9.1% in June. However, the battle is not yet won. So, expect Powell to repeat his warnings that disinflation will be “bumpy” and there’s a long “ways to go.” But what Congress (and virtually everyone else watching the testimony) wants to know is when we can expect interest rates to peak. Naturally, Powell is not going to answer that — instead he’ll say something about how the bank is data-dependent and taking things as they come. 

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