"US Fed Chair Powell Supports 25bp Hike... Was It a Bad Move?"

Chairman Powell's 'Support for 25bp Increase' Remarks
Rising Possibility of 50bp Hike in May, Doubts Remain on Controlling Inflation

[Image source=Yonhap News]

[Asia Economy Reporter Junho Hwang] "Was Federal Reserve (Fed) Chair Jerome Powell's mention of a 25bp increase a bad move?"

Seungyoung Park, a researcher at Hanwha Investment & Securities, raised this suspicion in an investment strategy report on the 7th, stating, "It was expected that the stock market would steadily rebound after the FOMC, but the possibility of continued volatility has emerged."

Chairman Powell said at the House hearing held on the 2nd, "I support a 25bp rate hike at this month's FOMC." With a rate hike highly likely this month, some Federal Reserve Bank presidents were calling for a 50bp increase, and this statement came as the Fed's response level to geopolitical risks was being gauged.

However, the market interpreted his remarks as 'dovish.' The U.S. interest rate futures market began to reflect a 50bp hike possibility in May immediately after the hearing. The expected probability of a rate hike in March in the U.S. interest rate futures market fell from 0.23%p to 0.21%p. Conversely, the expected probability of a rate hike in May rose from 0.27%p to 0.32%p. Notably, after Powell's remarks, the U.S. 5-year breakeven inflation rate rose to 3.31% on the day of the hearing, the 2nd, surpassing the highest level since the outbreak of COVID-19.

Researcher Park analyzed, "The market judged that the Fed might be reluctant to normalize monetary policy due to geopolitical concerns." He added, "Stocks are expected to rebound only if monetary policy is normalized and inflation expectations are controlled," and "If the direction of inflation and monetary policy remains unclear, volatility in financial markets will be difficult to subside."

Meanwhile, movements of speculative forces in the commodity market have been detected. According to the U.S. Commodity Futures Trading Commission (CFTC) data, the non-commercial 'net long positions' in commodities comprising the CRB Index (an index representing the average prices of 19 commodity futures) increased from $140 million the previous week to $150 million on the 22nd. Considering that Russia's invasion of Ukraine occurred on the 24th of last month and Powell's House hearing was on the 2nd, speculative demand may have increased further.

If the rise in commodity prices is based on actual supply and demand, it does not significantly harm demand, but if speculative demand is added, it could burden the real economy. Recently, the global consumer discretionary sector has shown weakness, which can be interpreted as evidence of concerns that rising commodity prices are suppressing the economic rebound.

Researcher Park analyzed, "While buying financial stocks such as insurance to hedge against rising interest rates is worth considering, it is better to keep purchases of domestic cyclical stocks relying on rising commodity prices short-term." He advised, "It is still necessary to focus on sectors like large semiconductor and internet companies, which have high profit margins and relatively low cost pressures."

This content was produced with the assistance of AI translation services.