Concerns Over Big Step Pivot... Fed's Powell Speaks This Week

Will the Fed continue with baby steps (a 0.25% point increase in the benchmark interest rate), or will it shift to big steps (a 0.5% point increase)? Amid rising uncertainty over the tightening intensity due to persistent inflation, market attention is currently focused on the remarks of Jerome Powell, Chair of the Federal Reserve (Fed). It is anticipated that the market could once again experience volatility depending on the tone of Powell's statements.

According to MarketWatch and others on the 5th (local time), Powell is scheduled to appear before the Senate and the House at 10 a.m. on the 7th and 8th, respectively, to deliver the semiannual monetary policy report and respond to lawmakers' questions.

At this event, Powell is expected to emphasize the need for continued tightening to reduce inflation, while avoiding direct comments on the specific size of the rate hike. Bloomberg News reported, "Ahead of the release of the February employment report this week, Powell will be asked whether he is considering expanding the rate hike to 0.5 percentage points."

[Image source=AP Yonhap News]

This year, Powell's public remarks will be his third, following the February Federal Open Market Committee (FOMC) meeting and a discussion at the Washington DC Economic Club. It will also be his last public speech before the March FOMC meeting scheduled for the 21st-22nd. Especially as recent employment, inflation, and consumer indicators have all remained strong, there is speculation that Powell may signal a stronger tightening stance. Important indicators influencing rate decisions, such as the February employment report and the January Job Openings and Labor Turnover Survey (JOLT), are also scheduled for release this week.

Laura Rosner-Warburton, senior economist at Macropolicy Perspective, stated, "This week, Powell will emphasize that the Fed still has more work to do," adding, "They will continue tightening until their job is done. The Fed has suffered a double loss due to unexpectedly strong indicators." Michael Gregory, chief economist at BMO Capital, assessed, "The Fed has become slightly more hawkish than we expected at the end of last year." MarketWatch noted, "Powell's congressional remarks are expected to be very concise."

However, Wall Street experts predict that Powell will be reluctant to provide specific answers regarding the size of the rate hike. This is because key indicators that could influence the March FOMC, such as the employment report, consumer price index, and retail sales, will be released only after his congressional testimony. This is to avoid a repeat of last month’s situation, when the market was surprised by a stronger-than-expected employment report immediately after a disinflation diagnosis. Senior economist Rosner-Warburton said, "The Fed wants to review the February report before making decisions." The February nonfarm payrolls, to be released later this week, are estimated to have increased by 225,000.

Recently, Fed officials have made remarks leaving open the possibility of a big step, but some analyses suggest that an immediate shift to a big step in March is unlikely. According to the Chicago Mercantile Exchange (CME) FedWatch tool, despite heightened concerns about tightening, the federal funds (FF) futures market still reflects over a 70% probability of a baby step in March. This indicates that while further rate hikes are expected, the likelihood of an immediate increase in the hike size is low.

MarketWatch pointed out, "It is common knowledge that Fed officials do not like to slow down the pace of rate hikes and then speed up again." The Fed is also mindful that switching back to a big step just one month after slowing the pace to a baby step could damage its credibility. Chief economist Gregory said, "That would send a strong error message," adding, "The Fed will not abruptly accelerate its pace." On the other hand, if Powell hints at the possibility of a big step and the February employment report exceeds expectations, the outlook for a big step could surge, causing market volatility to rise sharply.

The Fed’s specific future rate path is expected to become clear only after the release of the dot plot following the March FOMC meeting. The dot plot released in December last year projected the year-end rate at 5.0?5.25%. Chief economist Gregory warned, "If inflation indicators do not ease, we will soon have to talk about 6%." Currently, the US benchmark interest rate stands at 4.5?4.75%.

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