Fed chair Jay Powell has once again given financial markets what they have been demanding, but not wanting – a promise to lift rates faster to control inflation.
The Fed and Powell last week made it clear that there would be up to 7 rate rises this year and another 3 in 2023.
The markets and especially noisy miners like business economists and market analysts had been urging the central bank to ‘do something’ to tackle rapidly rising inflation.
And while the Fed sat and watched, it was berated for not doing enough and “falling behind the curve” which is similar to what the same cast of local miners have been urging for the Reserve Bank.
On Monday in his first speech after the Fed’s rate rise and predictions last week, Powell promised to move “expeditiously” to control inflation and will, if needed, use bigger-than-usual interest rate rises to do so.
“The labor market is very strong, and inflation is much too high,” Powell told a business conference. “There is an obvious need to move expeditiously to return the stance of monetary policy to a more neutral level, and then to move to more restrictive levels if that is what is required to restore price stability.”
In particular, he added, “if we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so.”
That saw the market lift the chances of a half a per cent rate rise at the Fed’s May meeting.
Powell repeated on Monday that the Fed’s reductions to its massive balance sheet could start by May, a process that will further tighten financial conditions.
His comments boosted US bond yields with the key 10 year yield for US Treasuries rise 14 points to just under 2.3%. The yield on two year bonds (which seem to react faster to Fed policy) jumped to 2.11%.
Wall Street was easier at the close with all three measures in the red.
The Dow shed 201.94 points, or 0.6%, to close at 34,552.99. The index was down more than 400 points at session lows. The S&P 500 finished marginally lower at 4,461.18, having been up 0.4% at its highs of the day. The Nasdaq Composite eased 0.4% to 13,838.46.
Powell’s warning had no impact on overnight ASX futures trading which showed a huge 80-point (1.1%) gain at the re-opening of trading Tuesday.
The Aussie dollar was trading back around 74 US cents around 8am Sydney time after dipping under that level earlier in trading.
