(Reuters) - Traders boosted bets the Federal Reserve will squeeze in a fourth rate hike this year after Jerome Powell told a congressional committee, in his first testimony as the new Fed chairman, that recent data has strengthened his confidence on inflation.
The Fed is widely expected to raise rates next month and in December signaled a total of three rate hikes this year. Fed officials will release new forecasts, including their views on the appropriate future path of rate hikes, when they meet next month.
After Powell’s comments under questioning by lawmakers, traders of futures tied to the Fed’s target policy rate increase bets on three rate hikes this year and began pricing about a one-in-three chance for a fourth rate hike.
** Powell says his personal outlook for economy has strengthened since December
** Powell says recent data increases his confidence that inflation will rise
** Powell says if Fed gets behind and economy overheats, will have to raise rates faster
** Powell says yield curve has been a problem in past when Fed got behind and had to raise rates quickly; that’s not the case now
JASON WARE, CHIEF INVESTMENT OFFICER, ALBION FINANCIAL, SALT LAKE CITY
“At the high level - Powell appears to firmly believe that the recently-passed tax bill may lead to increased fixed business investment, that results in higher productivity and thus faster wage growth.
“It seems that Mr Powell’s personal views on the strength of the economy have been upgraded since December ... so the market is keying off this idea of thinking maybe it won’t be 3 rate hikes, but maybe 4.”
DAVID KOTOK, CHAIRMAN AND CHIEF INVESTMENT OFFICER, FIRM CUMBERLAND ADVISORS, FLORIDA
“He did a great job. He did exactly what you would expect a centrist, skilled, new Fed chairman would do and could do and he did it. His prepared statement was exact and precise. His handling of questions and patience having to listen to the speeches directed at him - and they were intended for cameras to be used for political ads between now and November - he handled them all with aplomb.
“He refused to commit to some other path than the present, gradualist, path that recognizes that interest rates are going to trend higher and the Fed is going to shrink its balance sheet.”
MARK KEPNER, MANAGING DIRECTOR, SALES AND TRADING, CHATHAM, NEW JERSEY
“It was fine, the bond market sold off a little bit. I don’t think he was out to, I guess, calm markets that they are just going to be around to prevent bad things from happening. He basically said we are in a period here where we are having growth and they are in the middle of an unwind.
“The market should be comfortable they are doing it in a measured way and he said they were not behind the curve as far as where interest rates are. He needs to see how things progress over the next year or two and kind of go from there. I don’t think he was all warm and fuzzy but at the same time I don’t think he said anything that people didn’t know to begin with.”
MICHAEL O’ROURKE, CHIEF MARKET STRATEGIST, JONESTRADING, GREENWICH, CONNECTICUT
“There was a key reaction there when the futures came off a bit when he was asked about three versus four rate hikes, and his response was along the lines of we make these quarterly forecasts ... he said it’s his impression the economy was getting stronger, which subtly gave the indication that he was going to raise his personal forecast for four rate hikes this year, and that’s what the market reacted to.”
WALTER TODD, CHIEF INVESTMENT OFFICER, GREENWOOD CAPITAL ASSOCIATES, GREENWOOD, SOUTH CAROLINA
“The message from him and (Fed Governor Randal) Quarles yesterday is the economy is doing very well. For so long we have been in this mode of, ‘Well, the economy is doing ok,’ but there was always an exception or an excuse as to why it wasn’t doing better. And I think what you heard from Powell today was that things are pretty good.”
“Why is the market selling off? I think it’s back to rates moving on some of his comments.”
“I just think the market wants to hear some consistency, which largely you got. No major surprises or changes in the thought process of the Fed. And I would say he did a good job at delivering that.”
PETER CARDILLO, CHIEF MARKET ECONOMIST, FIRST STANDARD FINANCIAL, NEW YORK
“The moment he indicated there’d probably be more than three rate hikes this year you saw treasuries increase and the dollar ticked up while stocks went down.”
“What he was alluding to was that the 2 percent inflation target will be met before the market anticipates. That would mean rate hikes the market has yet to discount.”
“If we see the 10-year approach 3 percent we’d probably be on one more downward leg that could take the indices to levels we saw a few weeks ago ... a very trying period for the market could be ahead of us.”
ALEC YOUNG, MANAGING DIRECTOR, GLOBAL MARKETS RESEARCH, FTSE RUSSELL, NEW YORK
“Generally today’s driving theme is ‘buy the rumor, sell the news.’ In other words, while Powell’s comments are in line with dovish market monetary policy expectations, the benign nature of his testimony has already been priced in after days of big equity gains so the market is hesitating a little today. The news from Powell is good but it’s largely already discounted in prices.”
CHAD MORGANLANDER, PORTFOLIO MANAGER, WASHINGTON CROSSING ADVISORS, FLORHAM PARK, NEW JERSEY
“The testimony was ‘steady as she goes.’ I didn’t hear anything that raised an eyebrow. The Fed is gradually going to raise rates, reduce its balance sheet, and move in a delicate manner. If there is a credit market reaction that puts the economy at risk, they’ll reposition their behavior. Yes, investors are trying to get their arms around what the Fed is going to do in 2019 - not 2018 - so there is going to be some readjustment within equity markets. We’re had a terrific 24 months. A mild setback over a few trading sessions should not be a surprise.”
PETER CECCHINI, CHIEF MARKET STRATEGIST, CANTOR FITZGERALD IN NEW YORK
“I’m not sure his testimony had that much to do with the market action today. His statement was largely as expected as were his remarks. He’s trying to make sure he achieves the 2 percent inflation target while not overheating the economy.”
“His job is precisely that. He’s dealing with the concept of higher deficits as well.”
“We’ve had a heck of a rally and (stocks) might be near term overbought. “
JOHN CANAVAN, MARKET STRATEGIST, STONE & MCCARTHY RESEARCH ASSOCIATES, NEW YORK
“He’s largely an even-handed, ‘steady-as-he-goes’ change. His performance seems comfortable and confident for markets. The market reaction right now doesn’t justify any walk-back from him when he appears before the Senate panel on Thursday. I don’t think he will make any rhetorical change.”
BONDS: The 10-year Treasury bond yield firmed to 2.9135 percent and the two-year Treasury note yield rose to 2.2741 percent.
The U.S. dollar index .DXY was up 0.42 percent.
Compiled by Alden Bentley