The Fed’s Far More Hawkish Than the Market Expected

Fed Chairman Jerome Powell

Stocks fell again this morning as sentiment soured further in response to mounting rate concerns. The Dow, S&P, and Nasdaq Composite all tumbled with rate-sensitive tech shares leading the way lower. Yields initially soared before retracing through noon as yields on 10-year and 2-year Treasurys temporarily spiked to reach new 3-month highs.

But stocks were unable to stage an intraday rally alongside falling yields due to persistently hawkish commentary from Fed officials. Yesterday, noted hawks Loretta Mester and Jim Bullard both said that the door is open for a 50 basis point rate hike at the Fed’s next meeting. Mester’s comments came before the market opened, causing futures to plunge. Bullard foiled an intraday rally when he spoke shortly before trading closed.

Today, it was Fed governor Michelle Bowman who whacked stocks lower.

“I think there’s a long way to go before we reach our 2% inflation objective and I think we’ll have to continue to raise the federal funds rate until we see a lot more progress on that,” Bowman said.

“We were seeing some progress in lowering inflation at the end of last year, but some of the data that we’re seeing early this year is not tracking with consistently lowering inflation in a way that I would like to see.”

Stocks spent the last few weeks ignoring the Fed’s warnings that rates could be held higher, longer than expected. Bonds did not. Treasurys are down significantly on the month while the S&P is still enjoying a major mid-February gain.

“We have been in a very contentious tug of war between the equity markets and the treasury markets,” said B. Riley chief market strategist Art Hogan.

“Equity investors seem to be looking through a couple more rate hikes and looking forward to a pause.”

Mester, Bullard, and Bowman indicated that the opposite is about to happen.

“On the back of those comments, investors moved to price in a growing probability that the Fed might choose to move by more than 25bps at the next meeting in March,” wrote Deutsche Bank analysts in a note to clients this morning.

That’s especially damaging for bulls in light of January’s red-hot economic data. The jobs report, Consumer Price Index (CPI), Producer Price Index (PPI), and retail sales report all cleared a path for the Fed to uncork a 50 basis point rate increase at the next FOMC, which wraps up on March 22nd.

That’s more than a month away, but the mere anticipation of a big hike could lead to nervous selling from bulls who are now sitting near the top of an impressive “January effect” rally.

All while Fed officials continue to deliver hawkish, potentially uptrend-ending remarks.


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