{"id":187243,"date":"2023-03-23T12:00:00","date_gmt":"2023-03-23T16:00:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=187243"},"modified":"2023-03-23T12:39:45","modified_gmt":"2023-03-23T16:39:45","slug":"markets-continue-to-expect-rate-cuts-shrugging-off-powells-sternness-mar-23-2023","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/macro\/markets-continue-to-expect-rate-cuts-shrugging-off-powells-sternness-mar-23-2023\/","title":{"rendered":"Markets Continue to Expect Rate Cuts, Shrugging Off Powell\u2019s Sternness: Mar. 23, 2023"},"content":{"rendered":"\n

Federal Reserve Chairman Jerome Powell remained on the inflation fighting path yesterday, despite recent bank failures and financial stability concerns. A unanimous 25-basis point (bp) rate hike by the committee was accompanied by Powell\u2019s stern warnings that a slider could be the next step required for striking out inflation because recent economic data has been hotter than expected.<\/p>\n\n\n\n

Powell had to walk a fine line. Raising rates aggressively could have risked worsening the banking crisis, but taking a dovish approach could have had two drawbacks\u2014it would have signaled that the Fed believes the banking system is too fragile to handle the stress of higher interest rates and it would allow strong inflation to continue. When announcing the small rate increase, Powell cautioned that the Fed has to do more to contain inflation, a concern reinforced this morning when the jobless claims report for the week ended March 18 showed that initial claims fell by 1,000 to 191,000 compared to 197,000 applications expected by a Bloomberg survey of analysts.<\/p>\n\n\n\n

Despite Powell\u2019s hawkish tone, markets are rallying this morning as investors believe the Fed is finished hiking rates and will begin cutting them as soon as July. Equities are higher, erasing yesterday\u2019s steep losses, with the S&P 500 Index down 1.7% and the tech-heavy, interest rate-sensitive NASDAQ Index rising 2.4%. Short-term yields and the dollar are continuing to build on downside momentum as wagers of a lighter Fed mount. The 2-year Treasury yield is hovering at its lowest level since September, down 7 bps to 3.91% after falling roughly 25 bps yesterday. The Dollar Index is down 0.1% after falling roughly 1% yesterday. Oil prices are attempting to build some momentum after falling to their lowest levels since December 2021. WTI crude oil is up 0.8% to $71.50 a barrel as rising demand from the Chinese reopening offsets the deflationary pressure propelled by abundant supply in the U.S. The 10-year Treasury yield is roughly flat at 3.48%, supported by inflation expectations and higher oil prices.<\/p>\n\n\n\n

Yesterday\u2019s steep market selloff occurred after Powell attempted to walk a narrow path between maintaining bank stability and fighting inflation. In doing so, he struck a cautionary tone that dashed investors\u2019 hopes that he would provide a dovish outlook for monetary policy. A few key points included the following:<\/p>\n\n\n\n

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If the bank failures lead to tightening liquidity conditions, the Fed may not need to continue with rate hikes. It\u2019s likely that a tighter and incrementally cautious regional banking system has the similar effect of a few rate hikes, as capital access to households and businesses become increasingly constrained.<\/strong><\/p>\n<\/blockquote>\n\n\n\n