After opening flat on Tuesday, US stocks plunged into the red after Fed chair Jerome Powell told lawmakers that interest rate hikes will likely be higher and faster than previously expected.
"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," Powell said in prepared remarks for a hearing before the Senate Banking Committee.
"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."
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Inflation remains well above the Fed’s 2% target, with the latest Consumer Price Index report for January showing inflation increased 6.4% year-over-year.
The Fed’s next rate-setting meeting kicks off in two weeks, with a policy announcement set for the afternoon of Wednesday, March 22.
50bps 'back on the table'
CMC markets chief market analyst Michael Hewson said Powell’s comments have prompted markets to price in the prospect of a return to 50bps rate hikes.
“We of course still have to navigate the payrolls report on Friday and the CPI next week which could reverse this,” he said.
“Weak readings here could see today’s up moves in yields reverse, however even if they don’t an upshift to 50bps after downshifting to 25bps would not be a good look.
“Nonetheless, higher for longer appears to be the new narrative and the Fed won’t want to be seen to flip flop on the pace of rate hikes, which means 25bps remains the most probable outcome with hawkish guidance. “
Markets.com chief market analyst Neil Wilson said, for now, the market is hearing the “higher for longer’ message loud and clear and doesn’t see the Fed being dissuaded.
“We see 50bps very much back on the table for the next couple of meetings, and the potential to increase the pace of tightening again is noteworthy and probably the chief cause of the market reaction,” he said.
“Swaps pricing in higher peak policy rate of 5.6% area in September but 6% is now absolutely more likely than not.”
Shortly after Powell’s comments, the Dow Jones Industrial Average had shed 149 points, or 0.5%, at 33,282 points, the S&P 500 was down 27 points, or 0.7%, at 4,021 points, and the Nasdaq Composite had lost 55 points, or 0.5%, at 11,620 points.
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