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Interest rate hikes? Full speed ahead says Powell. Stocks choke

Written By | Feb 27, 2018
interest rate

Cartoon by Branco. Reproduced with permission. (See below)*

WASHINGTON, February 27, 2018: After Monday’s latest bout of irrational exuberance, which took stocks back into overbought territory, new Fed Chair Jerome Powell splashed markets with cold water Tuesday morning. Among other key issues, in his testimony before the House of Representatives, Powell discussed the dreaded topic of 2018 interest rate hikes.

“The new chair signaled the central bank could hike rates more than three times this year should economic and inflation data continue to prove healthy.

“The Dow Jones industrial average fell 32 points, with Disney and Home Depot contributing the most to the index’s losses. The S&P 500 fell 0.3 percent; real estate and consumer discretionary weighed the most on the index.”

Above italics are ours.




Powell’s remarks on interest rates and inflation were part of his report on the Fed’s outlook for monetary policy this year. In explaining the rationale for his interest rate comments, he said

“‘We’ve seen some data that in my case will add some confidence to my view that inflation is moving up to target,’ Powell told lawmakers. ‘We’ve also seen continued strength around the globe. And we’ve seen fiscal policy become more stimulative. So I think each of us is going to be taking the developments since the December meeting.’”

According to CNBC,

“Commenting on Powell’s prepared comments, strategists found the Fed’s outlook generally positive.

‘I think [the stock] reaction to his comments about slightly strong growth and that the Fed was more likely to raise rates more in 2018 than investors had anticipated,’ said Kate Warne, investment strategist at Edward Jones. ‘You saw some reaction, but not a dramatic one. Investors have become increasingly comfortable that if rates continue to rise slowly in response to economic growth, that’s a good thing.’

“Warne added that despite expected hikes, the Fed’s monetary policy remains largely accommodative.”


Read also: Powell testimony, interest rates on tap as markets strain to regain equilibrium


Despite Warne’s observations, U.S. traders seemed to be taking a dim view of Powell’s unexpectedly “hawkish” comments on interest rates. As word of his testimony dribbled out into the media, his interest rate remarks sent the major averages modestly down after Tuesday’s opening bell.  Averages briefly panicked,  sending the Dow Jones Industrial Average (DJIA) down over 100 points before they bounced back once again.

From there, the DJIA and the other major averages are continuing to yo-yo as they have for the last two weeks. As of 1:30 p.m. ET, the widely followed Dow is off 45+ points as it continues on its wobbly course.

Not surprisingly, a great deal of today’s spookiness is being caused by an unusual 5-cent spike in the yield of 10-year treasuries. Current yield in these instruments stands at 2.91 percent. As we’ve mentioned here several times before, if the 10-year interest rate on treasurys meets or exceeds 3 percent in the near term, that widely-followed benchmark could very well trigger another market crunch, as fear of recession replaces fear of inflation in investors’ and machine algorithms’ minds and virtual minds.



Aside from today’s somewhat negatively nuanced Fed assessment, the usual WashingToons in the House made sure they beclowned themselves again today, going off topic during Powell’s give-and-take in the house to virtue-signal while actually betraying an astounding ignorance of current events.

CNBC reports that

“The hearing became a sounding [board] for grievances about all sorts of Trump administration policies, particularly the tax cuts passed in December.

“Rep. Al Green, D-Texas, conceded he was playing the ‘race card’ because of his concern over persistent high levels of black unemployment.

“‘With their tax scam, Republicans have engineered a massive giveaway to corporations and the ultra-rich, at the expense of hardworking Americans,’ complained Rep. Maxine Waters, the California Democrat who serves as ranking member of the committee.

“Powell appeared flummoxed at times by some of the comments, though he tried to answer the wide-ranging questions as best he could.”

We’d be flummoxed, too, given that black unemployment is now at its lowest level in many years, while most Americans continue to rejoice at their higher take-home pay, the result of the GOP tax cut that the predictably asinine Maxine Waters decried. If the Democrats keep up this kind of nonsense, their dream of winning House and Senate majorities this fall will become a distant memory.

Back in the Land of Reality, the Dow is slowly heading for the basement as we conclude this article, off 84 points as we conclude our observations at around 1:45 p.m.

We won’t waste time trying to predict Tuesday’s close. Volatility still remains elevated, so it’s anybody’s guess where the numbers will end up.

*Cartoon by Branco. Reproduced with permission and by arrangement with Legal Insurrection.

 

Terry Ponick

Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Senior Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17