Twice the president of the United States Federal Reserve in the Senate this week and twice insisted that they will continue to use their best tool to curb inflation: the interest rate hikes. Jerome Powell’s pulse did not tremble when asked his impressions regarding a hypothetical increase in unemployment in the US as a result of his policies.
“It is not an intentional result,” Powell came to declare. “The inflation is extremely high and that is bad for the whole country, not just for two million people who could be left without work,” he added.
At the same time, he assured this Wednesday that the Federal Reserve (Fed) has not made any decision on the outcome of its next meeting on March 22 -to reduce the tension of his words- after estimating that “the macroeconomic data that we have seen so far now they suggest that the ceiling (of the types) has to be higher than we expectedAccording to the Fed Chairman.
But the market makes another reading of Powell’s statements. The tone of the person in charge of the Fed was interpreted as a clear declaration of intent in favor of continuing with the interest rate hikes in the United States. A tightening of the Federal Reserve’s monetary policy that would already be seen at the next meeting -in which the Fed’s macro chart will also be updated- and for which a increase of 50 basis pointsaccording to Bloomberg.
In other words, the increase would double what was considered after the February meeting and would mean accelerating the increases, given that the last decision was to increase rates by 25 basis points. “If Powell had indicated his preference for a rise of 25 basis pointswithout ruling out the 50, the market could have hesitated, but Powell was more aggressive,” estimated Citi chief economist Andrew Hollenhorst.
This, in turn, has displaced and increased the duration of the restrictive cycle in the United States, where it is discounted that the ceiling will be reached at 5.5% -50 points above what was projected when the year began- although the 5.75% begin to enter the scenarios of various firms investment. This is the case of Goldmans Sachs, while the OIS (Overnight Indexed Swaps) curve suggests that it is more likely, today, to reach the high range of that interest ceiling.
This change in scenario shook the market, which has gone from considering a rate cut in 2023 to once again including the possibility of a recession in the United States. It reflects the fixed income market and it is shown by the evolution of the main stock market indices that have halted the rises that began in October of last year. “The risk of a recession has increased in recent weeks, as the effect of the Fed’s tightening delay will soon be apparent in new data,” Main Street Research analyst Jammes Demmert said.
The expert refers to the next unemployment data in the US that is published this Friday and for which no change is expected from the experts. In other words, it would continue at 3.4% -the lowest figure in half a century- and it would be one of the pretexts that the Fed would use to maintain a profile hawkish in his politics. The other would be the data on consumer prices for February, which will be published a week before Powell’s decision and for which it is discounted that it would fall to 6%with the rise in energy prices.
The US two-year bond exceeds 5%
While the Wall Street stock market hesitated with the statements in the Senate of the president of the Federal Reserve, the US bond with a maturity of two years exceeded 5% yield and marks a sensitivity to risk not seen since 2007. In this way, the short-term US sovereign debt reflected the fear of investors that the monetary policies of the institution supervised by Jerome Powell could lead the country’s economy into recession, with the increase expected from the March meeting (see main text).
And it is that Powell’s words caused the sale of US debt with a maturity of two years, while the rest of sovereign bonds to that reference they lived a session in which, although sales predominated, they were not as bulky as in the North American case.
On this occasion, it was not the 10-year bond that registered an upturn in risk, which is already hovering around 4% in response to the expected tightening of monetary policy. Another aspect that draws the inversion of the curve in the United States, which continues to grow and deepens the difference between short-term and long-term debt at levels not seen for over 40 years. This would imply, if the theory is applied without quibble, that investors are pricing in higher US interest rates over the next two years.
And, as it is from the debt maturing in three years when the return required by the secondary market falls, with respect to the previous reference, it would be from then on when the market discounts that the rates would be below the current ones.
