Jerome Powell dampens hopes of a Fed pivot
Hopes of a Fed pivot were dashed by Jerome Powell’s speech last night. Major US indexes fell late on Wednesday, with the Nasdaq 100 and Russell 2000 down more than 3% and the Dow Jones down 1.5%.
The central bank president warned that there remains significant uncertainty about the level of the federal funds rate target, which could be higher than what officials at the institution estimated in September. Jerome Powell also judged “very premature” the idea of a pause in monetary tightening, thus showering the hopes of a pivot.
Powell also clarified that the risks are asymmetrical. If the Fed does too much, it can always loosen its monetary policy, while if it does not tighten enough, you have real problems. In other words, the Fed would rather take the risk of doing too much than not enough.
The bond market did not remain indifferent. Long rates rose slightly, but short rates jumped. The US 2-year rate rose 7 basis points on Wednesday and rose 10 basis points on Thursday. It must be said that market operators now anticipate that the Fed’s terminal rate will remain between 5.00% and 5.25% for longer (until November 2023 compared to July previously).
The next major catalyst for Wall Street will be Friday’s monthly jobs report. A much larger number of job creations than expected would reinforce the Fed’s confidence in its ability to tighten its monetary policy without causing a recession, which would increase the pressure on the markets.
Daily Dow Jones Price Chart – Key Levels