Monique N. from Macon, GA asks: Hello Mitch, I was reading about Jerome Powell’s remarks to Congress and watched some of the video clips from the testimony. It seemed to me like he was not feeling very good about the inflation picture and that they’re likely to raise interest rates much higher from here. All in all, it seemed like pretty bad news. What’s your take?
Mitch’s Response:
Thanks for writing. I think your instincts were right to pay attention to the Fed Chairman’s testimony last week. It’s a good idea to follow the Fed’s thinking closely, especially as economic data rolls in, to gather clues regarding where the peak of this interest rate cycle will land (known as the terminal interest rate).1
I think the conclusion we can draw from Chairman Powell’s testimony is that the Fed has not been too encouraged by recent spending, hiring, and inflation data. January payrolls were way above expectations, retail spending jumped 3% from December, and the Fed’s preferred measure of inflation (Core PCE) was up 4.7% year-over-year in January – higher than December’s 4.6% y-o-y increase. In short, the economy remains too hot.
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In Chairman Powell’s testimony, he somewhat surprised markets by indicating a willingness to increase the pace and/or size of rate increases in the coming months. In his words, “if the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.” This is not the stuff of ambiguous “Fed speak,” it is pretty clear what he means.
At the last Fed meeting, interest rate futures markets were pricing in a 4.9% peak for the fed funds rate (it is at 4.25% now), with cuts commencing around the fall. By early March, investors were forecasting a peak rate of 5.5% with no cuts in 2023. Those estimates are likely shifting slightly higher now. The last time the fed funds rate crossed 5.25% was in 2006, and rates have not pushed higher than that level since 2001. In other words, the Fed is considering pushing rates to their highest levels in over 20 years.
Chairman Powell’s testimony was especially impactful because it runs counter to the messaging that the Fed has been delivering the market over the past few weeks, where officials have been stressing that it made sense to slow the pace of rate increases so they could better evaluate the effect that higher interest rates were having on economic activity – since rate increases work on a lag. They seem to be willing to abandon this stance now, which introduces a level of uncertainty that I would agree is a negative for markets.
The information is out there now, however, and I think the further we move into 2023, the clearer the picture will become for where interest rates will peak. It’s also worth noting that Chairman Powell told the House: “I stress that no decision has been made on this,” perhaps seeking to temper his comments to the Senate the day before. Time will tell, but from an investment standpoint, investors should remember that waiting for interest rates to peak and trickle lower means you’ll probably be too late for a market rally that’s likely to precede it.
So, what can investors expect in the months ahead? There isn’t an exact answer, but to help you protect your investments against rising interest rates.
I recommend reading our new guide. This guide covers the history of the Fed raising rates to better help you with your financial planning going forward. You’ll get insight on:
- How stocks have performed historically in the midst of rising interest rates
- A brief history of Fed rate hike campaigns, and why they mattered
- Plus, more information and context to help make sense of the current environment so you can respond appropriately
If you have $500,000 or more to invest, download our free guide, The Federal Reserve is Raising Rates. What Does This Mean for Stocks?3’ today!
Disclosure
1 Wall Street Journal. March 8, 2023. https://www.wsj.com/articles/fed-chair-jerome-powell-returns-to-congress-for-second-day-of-hearings-e58457f7?mod=economy_lead_pos3
2 ZIM may amend or rescind the guide “The Federal Reserve is Raising Rates. What Does This Mean for Stocks” for any reason and at ZIM’s discretion.
3 ZIM may amend or rescind the guide “The Federal Reserve is Raising Rates. What Does This Mean for Stocks” for any reason and at ZIM’s discretion.
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