Federal Reserve Will ‘Be Nimble,’ Powell Says, But Backs March Rate Hike As Putin War Stokes Inflation

Federal Reserve chief Jerome Powell signaled Wednesday that a March interest-rate rate is “appropriate,” but stressed the impact of Russia’s Ukraine invasion is a wild card. After the release of Powell’s prepared, testimony stock market futures gave up some early gains.

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“The near-term effects on the US economy of the invasion of Ukraine, the ongoing war, the sanctions, and of events to come, remain highly uncertain,” Powell will tell lawmakers at a 10 am hearing. “We will need to be nimble in responding to incoming data and the evolving outlook.”

With inflation already running so hot and the Fed so far behind the curve, there’s a concern on Wall Street that policymakers may feel little choice to not only plow ahead with rapid tightening, but potentially step up the pace of interest-rate hikes. It’s not clear how much Powell’s prepared testimony will assuage that concern, though he’ll elaborate in a question-and-answer session.

The events so far, which have sent commodities prices surging and triggered a stock market correction, haven’t notably changed Powell’s tune. His makes testimony no mention of lower asset prices, while noting that “the labor market is extremely tight.”

“We are attentive to the risk of potential further upward pressure on inflation expectations and inflation itself from a number of factors.”

Powell said that he expects a hike in the Fed’s benchmark interest rate will be appropriate at the March 15-16 meeting. “Reducing our balance sheet will commence after the process of raising interest rates has begun,” he added.

Federal Reserve Reaction: Ukraine Vs. Omicron

Vladimir Putin’s invasion of Russia is just the latest recent inflationary curveball for the Fed, following the delta and omicron variants. Yet the variants were fundamentally different. While reining in economic growth by slowing the services-sector recovery, they are also fueled wage growth by shrinking the pool of potential workers, via early retirements, a spate of absences and childcare complications.

This latest crisis, from an economic standpoint, is all about increases that will slow growth to some extent by reducing spending power and potentially eroding demand. In that sense, it’s more of an unalloyed negative that the Fed might normally wait out. But if wage growth continues to remain red-hot, Fed policymakers could decide that they don’t have the luxury of patience.

“The Fed tends to look past higher food and energy prices driven by geopolitical events and would, in our view, only be compelled to hike more aggressively if it sees signs of a wage-price spiral, which is not the case right now,” Solita Marcelli, chief investment officer in the Americas at UBS Global Wealth Management, wrote Monday.

Powell’s emphasis on the tight labor market may shape Wall Street’s reaction to Friday’s jobs report.

Economists expect Friday’s jobs report to show the addition of 390,000 jobs in February, as the unemployment rate eased back to 3.9%, after rising to 4% in January.

However, there’s one thing in the jobs report that might be really good news for markets: a surge in labor force participation as the pandemic recedes.

Stock Market, Treasury Yield Action

Higher risk of disruption of key commodity supplies, following an escalation of sanctions on Russia over the weekend, triggered another leg down for the stock market on Monday and Tuesday. On Wednesday, crude oil futures surged another 8% to $112 a barrel, but major stock market indexes were poised to get an early bounce.

But the bounce lost steam following release of Powell’s remarks. Dow Jones futures pointed up 0.35%, S&P 500 futures 0.3% and Nasdaq 100 futures 0.2%.

On Tuesday, the Dow Jones industrial average closed 9.5% off its record closing high. The S&P 500 is 10.2% below its record close, while the Nasdaq is down 15.7% from its peak.

After tumbling on Tuesday, Treasury yields bounced on Wednesday. After the release of Powell’s testimony, the 10-year Treasury yield was up 6 basis points to 1.77%, while the 2-year yield rose 11 basis points to 1.42%.

The CME Group’s FedWatch page currently shows 90% odds of a quarter-point hike at this month’s Fed meeting, and 10% odds of a half-point hike.

Wall Street currently sees five rate hikes in 2022, lifting the Fed’s key rate to a range of 1.25%-1.5%. On top of that, the Fed has laid the groundwork for a partial reversal of its $4.5 trillion in Covid-era asset purchases.

Be sure to read IBD’s daily The Big Picture column the get the latest on the underlying market trend and what it means for your trading decisions.

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Futures Rise Slightly, Crude Oil Soars; Fed Chief Powell Sees March Rate Hike