Powell may be able to do his job with the markets

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Powell may be able to do his job with the markets

Markets may be helpful to the Federal Reserve, according to Bloomberg Breakingviews. The Eurodollar yield curve suggests the Fed will overshoot with rapid increases, which will then need to be reduced. In response to expectations, investors and enterprises may reduce spending and investing in a manner that lowers inflation. Without Powell’s commitment to lower rates.

Powell’s most aggressive remarks on Monday said the Fed might take greater steps than the 25-basis point rise last week. In addition, it might hike rates beyond what is considered the neutral level at which monetary policy is neither helping nor affecting the economy. The Fed’s latest median forecast for the rate next year is 2.8 percent, compared to what Piper Sandler forecast as the nominal neutral rate of 22%.

Investors have taken notice of the significant rhetorical U-turn on easy money policies. The eurodollar yield curve, which may be a window into what the market expects the Fed to do, hit a new high of 2.96% in June 2023, indicating that long-term rates will be lower than short-term ones. If that plays out, then that would be one of the fastest reversals after a rate hike.

The projections might encourage decision-makers to react more quickly, reshaping the economy. Typically rate changes take months or even years to cycle through. However, the CEO outlook for the first quarter of the Business Roundtable reveals that capital investment plans are decreasing by nine points, suggesting that corporate chieftains are already pulling back spending.

Changes in sentiment are gaining ground elsewhere. Corporate debt markets in the United States have halted activity as investors readjust their risk appetite for a rapidly changing rate environment. Mortgage application volume was down 8% from the previous week and 54% from the previous week, according to the Mortgage Bankers Association.

The risk is that Powell is so aggressive in his rhetoric that the market becomes too rapid. However, if inflation is maintained without Powell doing as much, the market might avoid the kinds of surprises it currently thinks.

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(The author is a Reuters Breakingviews columnist. Her opinions are her own.)

NEWS IN CONTEXT

– If inflation warrants it, US Federal Reserve Chair Jerome Powell said on March 21 that the central bank is prepared to take action more aggressively on rate rises.

According to the CME FedWatch Tool, investors increased the probability of a 50-basis point increase at the Fed’s May meeting to roughly 68%.

BreakingviewsReuters is the world’s leading source of agenda-setting financial insights. We share our huge business and economic stories with a global team of around 30 people in New York, London, Hong Kong, and other major cities in real time. Sign up for a free trial of our full service at and on twitter and at. All opinions are expressed.

Powell may be able to do his job with the markets

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