On Tuesday, Federal Reserve Chair Jerome Powell testified before the Senate Banking, Housing and Urban Affairs Committee. Powell’s testimony was more hawkish than expected, as he defended the Fed’s decision to raise interest rates to combat inflation and said more aggressive monetary policy is on the table. The target federal funds rate, which determines the lending rate between banks, is currently 4.5% to 4.75%, and Powell said the peak funds rate “may well be higher” than previously shared.
Stocks responded to Powell’s testimony, with the Dow Jones Industrial Average falling 575 points, or 1.7%, while the S&P 500 and tech-heavy Nasdaq shed 1.5% and 1.3%, respectively. Analysts at Goldman Sachs and Bank of America added another rate hike to their forecasts after a hotter-than-expected inflation reading last month, now expecting the central bank will raise rates to a top level of 5.5%.
The futures market now prices a 50 basis-point hike to the federal funds rate as the most likely outcome following the Fed’s March 22 meeting. Sen. Elizabeth Warren questioned the Fed’s view that a higher unemployment rate is a necessary condition to bring down inflation.
Overall, it appears the markets are expecting the Fed to continue its aggressive tightening campaign, with the possibility for more rate hikes in the near future. Powell’s testimony on Wednesday before the House will likely provide further insight into the Fed’s plans.