Jerome Powell’s testimony is rattling markets. Here’s what 4 strategists are saying about the Fed’s hawkish stance.
Powell #Powell
On Tuesday, Jerome Powell began his two-day testimony before Congress, with hawkish comments from the top central banker dragging markets lower and pushing up the odds of a bigger rate hike at this month’s policy meeting.
In his initial statement, Powell acknowledged the difficulty of getting stubborn inflation down to the Fed’s 2% target, and noted that there’s still work to do and higher rates to come. A higher-for-longer approach will likely be necessary, in his view, which will ultimately slow down the economy and weigh on the job market.
“[T]here is little sign of disinflation thus far in the category of core services excluding housing, which accounts for more than half of core consumer expenditures,” Powell said. “To restore price stability, we will need to see lower inflation in this sector, and there will very likely be some softening in labor market conditions.”
“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” he added.
Here’s how four strategists reacted on Tuesday to Powell’s comments.
Charlie Ripley, senior investment strategist, Allianz Investment Management
“Unsurprisingly, Chairman Powell delivered a message with hawkish undertones in his testimony to Congress. While acknowledging the recent string of economic data has been “stronger than expected”, he reiterated that ongoing increases in policy rates are warranted.
While some market participants might have been caught off guard by Powell’s comments, the reality is that he is largely affirming what the bond market has already priced in. The terminal level for policy rates will be slightly higher than previous expectations as the timing of an economic slowdown has been pushed further down the road.”
Callie Cox, US analyst, eToro
“Powell just said the quiet part out loud. The economy is performing impressively well, but that could complicate the Fed’s efforts to bring inflation down. Therefore, the Fed could accelerate rate hikes and hike more than expected to bring inflation down.
High inflation can warp our thoughts around money and drive a wedge through society, worsening trends like income inequality. Powell has made it clear that the Fed is willing to sacrifice growth and job market strength to ensure this doesn’t happen.”
John Lynch, chief investment officer, Comerica Wealth Management
“The bear market rally that began in October has been supported by hope over reality. Fed Chair Powell’s comments today should come as no surprise to investors. Employment and consumption have been strong, while the easy gains in the battle against inflation have been made.
‘Higher for longer’ should be taken seriously by the markets. We continue to position portfolios for quality in fixed income and value and profitable small caps in equities. Higher rates and inflation should prove a headwind for P/E expansion, so investors should expect total return to derive from earnings and income.”
Jeffrey Roach, chief economist, LPL Financial
“Rates will likely be higher than expected, but inflation is still the wild card as the Fed remains data-dependent. The Fed will have several key metrics in hand before their next meeting, including another look at retail sales and inflation.
Granted, inflation will likely stay elevated in the near term as consumers release pent up demand for services but rental prices, a key component for inflation, are set to decline as additional multi-family units come online in the coming months.”