The markets were expecting the US Federal Reserve to hike rates by 25 basis points (bps) in its FOMC meeting to be held on March 21-22. However, the odds of increasing interest rate by 50bps has increased post the Fed Chief Powell’s Congressional testimony. Powell’s testimony to the US Congress was conducted over two days and signalled an aggressive stance by the Fed. The incoming data points towards inflation remaining sticky and not coming down as swiftly as expected.
As per the Jobs data released today, which is a widely watched employment numbers from the Labor Department, US businesses employed more workers than anticipated in February, with nonfarm payrolls rising by 311,000 positions. The reason for Fed to go aggressive on rate hikes is more now.
Earlier, Powell hinted in his congressional testimony on March 7 and 8 that the Fed would raise rates more quickly than expected as a result of stronger-than-expected economic indicators. He noted stronger-than-expected data on factory output, consumer spending, and hiring shows persistent inflationary pressures.
Interestingly, Fed had climbed down its 75bps rate hikes to 50bps in December followed by a 25bps rate hike in January 31-February 1 FOMC meeting. Going back to a 50bps rate hike may send conflicting signals to the market and will raise concerns of Fed’s policy in taming inflation.
Several market observers continue to anticipate that the central bank will introduce a more gradual 25 basis-point increase. Several economists interpreted Powell’s comments as a sign that the Fed is more likely to make a larger decision at its next FOMC meeting on March 21–22.
A 50bps rate hike also shifts the focus on terminal funds rate which might end up near the 6% mark from the current 4.5% to 4.75% range.
Before their next FOMC meeting, the US Fed will have a chance to evaluate the February jobs report and US CPI inflation numbers to be released on March 14. The inflation date for February to be announced on March 14 may turn out to be a saviour for the Fed if 25bps of rate hike is what they want to stick to. Any negative surprise may spook the markets and the investors.