By Yasin Ebrahim
Investing.com – Federal Reserve chairman Jerome Powell is set for Capitol Hill on Tuesday, but the Fed chief isn’t likely to endorse the market's hawkish rate-hike forecast as the outlook on whether the economic reacceleration seen since the turn of the year has staying power or is transitory remains murky at best, experts say.
Market participants are currently pricing in around a further 86 basis points of hikes, but MUFG said it doesn’t “expect Fed Chair Jerome Powell to endorse that scale of further tightening” when the Fed chief takes to Capitol Hill to deliver his semi-annual testimony before Congress.
Powell is set for two days of testimony before Congress, on Tuesday and Wednesday.
The Fed chairman is more likely to “wait to assess further data in the coming months to see if the strength in activity and inflation is sustained before strongly committing to more rate hikes,” it added.
In an interview in February, Powell admitted that the Fed members didn't expect the January jobs report to be as “strong” as it was, but said it showed why the process [to bring down inflation would take “a significant period of time.”
The spigot of strong economic data including the blowout January jobs report and several signs of sticky inflation has forced market participants to abandon their recent penchant to “fight the Fed.”
Investors are now forecasting the peak level of Fed funds rates sits ahead of the 5.1% level the Fed had projected in December, with whispers of rates reaching nearly 6% recently seeping into the investment narrative.
While the swashbuckling start to the year for the economy has taken many by surprise, others suggest more data is needed to suss out whether the economic reacceleration is real or transitory.
“For any additional tightening beyond the May meeting, we would need to see evidence that the reacceleration is real,” Morgan Stanley said.
Fortunately, investors won’t have long to wait for a clearer outlook on the economy. The monthly jobs report for February due Friday isn’t expected to replicate the 500,000+ job gains seen in February.
“Another blowout NFP report is highly unlikely in the week ahead,” MUFG says, though it remains on alert for an update surprise in wages that perhaps “provides the biggest risk of another hawkish surprise that could lift U.S. yields and the U.S. dollar further.”
For the moment, however, the strong data seen thus far has done enough to sway the pivoteers, who were confident a Fed cut was on the table, to relent.
“We have moved our call for the first rate cut from December 2023 out to March 2024, and thereafter expect an even more gradual easing cycle with 25bp cuts per quarter, instead of one per meeting previously,” Morgan Stanley added.