Powell blows up stock market party: Fed boss expects higher interest rate peak

The US economy is booming and inflation is stubborn.

Powell blows up stock market party: Fed boss expects higher interest rate peak

The US economy is booming and inflation is stubborn. Fed Chairman Powell has indicated that he will tighten interest rates more than initially expected. He spoils the buying mood of the investors.

In view of persistently high inflation, US Federal Reserve Chairman Jerome Powell is signaling a higher interest rate peak to the financial markets. According to the transcript of the speech, the latest economic data was stronger than expected, he said at a hearing in the US Congress. This suggests that the final level in policy rates is likely to be higher than previously expected. It will likely be "a long and bumpy road" to bring inflation back to the central bank's target of 2.0 percent.

Futures markets are expecting a half-point rate hike for the March 22 Fed meeting. The US Federal Reserve recently raised the key interest rate by just a quarter of a percentage point - to a range of 4.50 to 4.75 percent. Powell now stressed that the Fed is ready to pick up the pace if the "body of data" calls for faster tightening.

The statements by the top currency watchdog fueled interest rate fears on Wall Street. The most important US indices were around half a percent in the red. On the other hand, the expectation of higher interest rates boosted the US currency. The dollar index, which measures the US currency against other major currencies, climbed 0.8 percent to 105,140 points.

"Powell is specifically talking about a higher target for interest rates. That's something the market has been talking about but obviously hasn't fully priced in," said Chris Zaccarelli, chief strategist at independent advisor alliance. At the next monetary policy meeting, the Fed will present an updated interest rate outlook - the so-called "dot plot", which the financial markets use as a guideline for the further course of monetary policy.

In its outlook before the turn of the year for the end of 2023, the Fed management team had estimated an average key interest rate of 5.1 percent. According to Powell's remarks, it can be assumed that the "dot plot" indicates a higher interest rate peak, say Commerzbank economists Bernd Weidensteiner and Christoph Balz: "In view of the inflation data of recent times, this was already expected, but it is now almost official Seal." The two bank economists are currently forecasting hikes of 25 basis points each over the next three meetings to 5.50 percent as the upper limit for the interest rate range. However, this increasingly appears to be the minimum. Should the next data surprise upwards again, an interest rate peak of six percent would be realistic.

Minutes from the most recent interest rate meeting show that policymakers continue to see the risk that they may have to do more to contain inflation. Because US inflation has recently been more persistent than expected. The inflation rate fell only minimally to 6.4 percent in January. At the top of the US Federal Reserve, various variants are currently being played out for a bold or rather cautious approach to future interest rate increases. According to Board member Christopher Waller, the Fed may have to raise interest rates more than previously targeted. It is important to pay attention to the economic data for the coming weeks. This will show whether the boom in the labor market will cool down as desired by the Fed and inflation will continue to retreat or not.