Link to article: https://www.cnbc.com/2023/03/09/powell-changed-everything-this-week-on-markets-view-of-interest-rates.html
Before the Fed Chairman's speech, the market initially expected a 0.25 percentage point increase in the benchmark interest rates. However, after Jerome Powell's appearances where he cautioned that if inflation data remains strong, he expects rates to go "higher than previously anticipated", which then led the market to change its expectation to a half-point increase in March.
The reason behind his remark is attributable to the January higher-than-expected inflation data as well as a strong sign of the labor market despite the Fed's effort to slow it down. The unemployment rate at the moment is 3.4%, which is still considered quite low for a tightening monetary policy.
After this change in expectation, the market, especially equites, experienced more sell-off as investors became more nervous about the future rate hikes as nothing seems to be certain right now.
4 comments:
This is a really timely post because we anticipate rates to go up because of the Fed's response to a strong labor force, but the sudden drop in the stock market recently proves that businesses are listening. As mentioned previously in class, Economics is one of the few sciences where people's expectations and anticipation can actually change the outcome for the economy. Businesses are always quick to react at any hint of a recession because they want to ensure the survival of the company during a downfall. The labor market, however, may remain strong despite interest rate increases because of consumer confidence.
An increase in interest rates will make borrowing money becomes more expensive, which can impact a business's ability to finance its operations or expand. Consumers may also spend less, which can lead to a reduction in demand for goods and services. Higher interest rates can also result in lower stock prices and changes in exchange rates, which can affect businesses operating globally. In short, an increase in interest rates can create uncertainty and volatility in the market, which can impact business decision-making.
This was one of the main reasons that the SIVB collapsed in just a couple days. As a politician, you have to be careful with what you say because the consequences could be dire. In this example, a top investment bank went under because of the economic uncertainty created by Jerome Powell created.
Everything Powell says in the public is taken heavilly. It does not surprise me that people are fearful of him raising interest rates due to how they contract the economy. I am curious to see what he pans to actually do, but expectations are not good going forward, so I think we will dive deeper into a recession.
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