Stock-market investors didn’t panic, but they didn’t love what Jerome Powell had to say Tuesday in his public debut as chairman of the Federal Reserve.
Whether a faux pas or deliberate, Powell, in highlighting ways he personally thinks the economic outlook strengthened since the Fed’s last meeting in December, seemed to take market participants by surprise.
Here’s a look at some of the key market takeaways from Powell’s testimony before the House Financial Services Committee:
4 rate hikes more imaginable
Investors are still largely penciling in three rate increases in 2018, but Powell’s remarks saw them ratchet up the possibility that policy makers could move faster than their December forecast indicated.
Fed funds futures now put the probability of four rate increases in 2018 at around 32.1%, up from 24.4% a day earlier, according to data from CME Group.
Stocks suffer, volatility ahead
The prospect of a more aggressive Fed was enough to end a three-day stock-market winning streak. The Dow DJIA, -1.16% ended with a loss of just shy of 300 points, or 1.2%, while the S&P 500 SPX, -1.27% slumped 1.3%.
For investors, Powell’s testimony reminded investors that the Fed is dealing with an economy that is set to feel the effects of a massive fiscal stimulus boost, said Lara Rhame, senior economist at FS Investments. “When you push growth so much above potential, you’ve got to be careful what you wish for,” she said.
The impact of the tax cuts and additional spending will give the Fed more room to raise rates faster than what markets have priced in, and that means a bumpier road in financial markets. “The more you see the risk of a Fed overshoot coming onto the radar, the higher the volatility…This is going to be a theme we’re stuck with all year,” she said.
Treasurys dropped, pushing up yields, in an instantaneous reaction after Powell said data suggested a strengthening of the economy and labor market. Yields subsequently retraced a portion of the rise. The yield on the 10-year Treasury note TMUBMUSD10Y, +0.00% rose 4.8 basis points to end at 2.91%, while the two-year yield TMUBMUSD02Y, +0.00% rose 3.6 basis points to 2.266%.
The dollar and risk appetite
Powell’s comments lifted the dollar versus all major rivals. The Australian AUDUSD, +0.0385% and New Zealand NZDUSD, +0.0138% dollars saw steep declines and traditional havens like the Swiss franc USDCHF, +0.0533% and Japanese yen USDJPY, +0.09% declined modestly, noted Kathy Lien, managing director of FX strategy at BK Asset Management.
“This suggests that Powell’s comments may end up having a greater impact on risk appetite than the U.S. dollar,” she said, with the direction for major currencies at the mercy of equities.
“If the correction in stocks gains traction following Powell’s testimony, the dollar will extend its gains but the Japanese yen and Swiss franc could be the best performers,” she said. “If buyers swoop in and the losses in stocks are limited, [dollar/yen] will rally alongside risk currencies.”