Market Extra: How Fed’s Powell caught markets ‘off guard,’ extending stock selloff as Treasury yields soar

by | Nov 3, 2022 | Stock Market

Federal Reserve Chairman Jerome Powell takes questions during a news conference following a Federal Open Market Committee meeting on Wednesday.

Mandel Ngan/Agence France-Presse/Getty Images

Financial markets were absorbing the realization of how high Federal Reserve policy makers are willing to push interest rates, even if the issue of how long borrowing costs might stay there is unclear — causing stocks to head lower for a fourth straight session, Treasury yields to soar, and the dollar to creep higher on Thursday.

For the first time, traders are pricing in a very slim, less-than-1% chance that the fed-funds rate target could touch 6% by June or the second half of next year. Meanwhile, they also boosted the chances of the target rising to between 5.25% and 5.5% by March to 23% and likelihood of it getting to between 5.5% and 5.75% by May to 7.8%, according to the CME FedWatch Tool. The Fed’s main policy rate hasn’t been above 5% since 2006, and the last time it was at or above 6% was from March 2000 to January 2001.The rapid recalibration of expectations was evident across assets a day after the Fed’s policy decision on Wednesday. The Dow Jones Industrial Average
and S&P 500 extended losses while the policy-sensitive 2-year rate broke above 4.7%, turning the Treasury curve more negative in a deeply worrisome signal of an approaching recession. And the ICE U.S. Dollar Index
rose 1.4% to 112.92, one of its highest levels in more than 20 years.Read: What’s next for markets after Fed’s 4th straight jumbo rate hikeInvestors and traders have repeatedly clung to hopes that policy makers might shift away from aggressive interest rate hikes, and Wednesday’s post-meeting statement from the Fed initially reinforced that possibility because of the caveats included about the likely pace of future hikes. Instead, Fed Chairman Jerome Powell threw cold water on those assumptions, saying it was “very premature” to …

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