Jerome Powell, the newly installed chairman of the Federal Reserve, will be on Capitol Hill for an event Tuesday that may offer clues about the central bank’s plans for interest rates.
The stock market suffered wild swings to begin the month of February, reflecting investor concern that an accelerated pace of inflation growth will encourage Fed officials to boost interest rates more than it previously telegraphed. While the Fed has indicated that three rate hikes are in the pipeline for 2018, reports showing stronger-than-projected wage growth and consumer prices ignited speculation that officials will turn more hawkish.
Still, Wall Street has yet to be convinced that the Fed will even reach three rate increases in 2018. After last week’s publications of the Fed’s minutes from its January meeting, investors are pricing in just two hikes, putting 50% odds on a third. When Powell provides his semiannual testimony to the House Financial Services Committee, his first such appearance since replacing Janet Yellen earlier this month, investors will be doing their best to read the tea leaves amid some uncertainty over the Fed’s next steps.
“If there is a sign that the Fed may be thinking about more than three [rate hikes], there could be some volatility,” Sameer Samana, global equity and technical strategist at Wells Fargo Investment Institute, told FOX Business. “We do not expect that, and our current forecast calls for just two increases.”
A rate hike in March seems likely. Brad McMillan, the chief investment officer at Commonwealth Financial Network, noted that the Fed’s January minutes confirmed that internal growth projections improved because of positive economic indicators and the federal tax overhaul.
“Markets were looking for confirmation that the Fed expects to hike rates by another 25 basis points at the March meeting. They got that confirmation…,” he wrote in a note to clients Monday. “While markets are expecting a rate hike in March, [Powell’s] testimony will be watched for hints about further rate increases this year.”
Economists mostly viewed Powell’s ascent to the chairmanship as a continuation of Fed policies during Yellen’s tenure. The former investment banker, who is the 16th person to serve in the Fed’s top post, told lawmakers during his confirmation hearing that he would support the ongoing strategy to lift the federal funds target rate gradually and shrink the Fed’s balance sheet of Treasury and mortgage bonds, a process that began in October. Raising rates and downsizing the Fed follows years of near-zero rates and aggressive bond buying in the wake of the 2008 financial crisis.
Wall Street expects Powell to reiterate those themes Tuesday. The expectation remains that Powell will keep pursuing a gradual normalization of Fed policies “in a way that doesn’t derail the economic expansion” in the U.S., Samana said.