Fed Chair Jerome Powell’s hawkish testimony this week means that the markets expect the Fed to raise rates 0.5-percentage-points on March 22. Specifically, fixed income markets now see an 8 in 10 chance the Fed makes a bigger move up in rates this month. Just last week, markets viewed it as far more probable that the Fed would make a smaller 0.25-percentage-point move. It’s been an abrupt shift as the Fed’s meeting approaches.
Inflation Worries
There are two main reasons for the shift, both concern inflation. The first is that January inflation came in higher than hoped. Now, Powell mentioned that may, in part, be due to unseasonably warmer weather, but there are concerns that recent trends that bought inflation lower in the second half of 2022, may have now largely played out, and resulting inflation remains well above 2%, the Fed’s annual inflation target.
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