Federal Reserve Chairman Jerome Powell has arguably a bigger bully pulpit than does the U.S. president. His Monday speech sounding a more hawkish tone than usual has been greeted with acceptance and perhaps a measure of glee in the stock market.
Powell’s remarks yesterday before the National Association of Business Economics was followed by a slight market dip (the S&P 500 lost just 0.04% yesterday) and a more positive response this morning (ahead 0.81%).
Time was that talk of Fed hikes sent the market skidding, as investors were used to easy money. The onset of higher inflation has altered the landscape, however, and now the spiraling prices are viewed as a threat. The next release of the Consumer Price Index is slated for April 12, covering March. February’s CPI rise was a disconcerting 7.9%.
Powell’s address raised the possibility of hiking its target federal funds rate by a half percentage point at its policymaking panel’s next meeting, May 3-4. During its March gathering, the rate was boosted just a quarter point, from near zero.
Another part of his speech drew notice, when he substituted the word “expeditiously,” regarding the pace of Fed increases, in place of his customary descriptive term “steadily.”
That wording change and Powell’s tone prompted Wall Street strategists to conclude that the Fed will proceed more rapidly with its tightening campaign than it did the last time it lifted rates. As Jan Reid, Deutsche Bank’s global head of thematic research, wrote, “this is going to be a very different hiking cycle from its predecessor back in 2015.” Back then, the Fed lifted the target rate just once, followed by another single increase in 2016.
“Our best guess is that the shift in wording from ‘steadily’ in January to ‘expeditiously’ today is a signal that a 50bp rate hike is coming,” wrote Goldman Sachs Chief Economist Jan Hatzius in an investor note. “We now forecast 50bp hikes at both the May and June meetings, followed by 25bp hikes at the four remaining meetings in the back half of 2022 and three quarterly hikes in 2023Q1-Q3.”