Fed Chairman Jerome Powell testifies before Congress on Thursday, and he's not expected to back off comments that the Fed could raise interest rates more than it now forecasts, even though his remarks spooked markets.
In his first appearance as chairman, Powell made it clear that the Fed could find reason to raise interest rates more than the three times it forecast for this year, based on the economy and inflation. Powell made the comments when he delivered the first half of his semi-annual economic testimony before the House Financial Services Committee on Tuesday.
"I think he reinforced their desire to raise three times. Based on today's data set and the information he has in hand, he's going to raise three times, and he said he'll adjust that based on the news," said Peter Boockvar, chief market analyst at Bleakley Financial Group. Many economists see a fourth rate hike as a strong possibility.
Powell testifies before the Senate Banking Committee Thursday morning, after Tuesday's testimony sent Treasury yields higher and the Dow Jones industrial average down about 300 points.
Traders said concern about the Fed lingered Wednesday, as stocks staged another sharp sell-off. The ended the month down 3.9 percent, its worst month in two years. The S&P was down about 1.1 percent, to 2,713, Wednesday, breaking a key technical level of 2,730.
Investors dumped stocks on the final day of a negative month, and the dollar rose, weighing on oil and other commodities.
"The larger overhang: Is there another shoe to drop tomorrow with the very honest, straight- shooting Jay Powell?" said Art Hogan, chief market strategist at B. Riley FBR. "The worst thing he did was answer a question honestly." Hogan said Powell was simply discussing Fed processes when asked what it would take to raise the interest rate forecast.
The last several Fed chairs were viewed as being willing to take steps to calm markets if they became too volatile. "They would certainly take market volatility into account when they were making decisions," said Hogan. But it's too soon to test whether Powell will act like former Fed chairs Janet Yellen and Ben Bernanke and exercise a "Powell put."
Stocks now head into March, traditionally one of the better months of the year, on a wobbly note. The losses for February broke an extraordinary winning streak of 10 positive months for stocks, the longest since 1959.
Even so, Powell is not expected to change his tune before the Senate.
"I don't think he's going to be a guy that's going to tell Wall Street what they want to hear. He's going to tell Wall Street what he wants to say," said Boockvar. "He'll get the respect of people who don't think the central bank should be kowtowing to Wall Street after every tantrum."
Powell's comments were written off by some as a "rookie mistake," meaning the Fed chairman did not intend to move the markets. But others doubt that the comment itself was unintentional, noting it echoed the statement and the minutes from the last meeting headed by his predecessor, Yellen. In those minutes, the Fed gave a nod to the improving economy and said it could be that "further gradual policy firming would be appropriate."
Grant Thornton chief economist Diane Swonk said the Fed chief's comments were measured and he followed the progression of Fed speakers and releases.
"I think the window was already open when they said 'further.' To me this is evolutionary. The markets won't get off of 'lower for longer,' meaning they expect lower interest rates forever. The markets have had a wake-up call, and it appears they need it. Interest rates are going up," said Swonk.
Powell's actual comments were balanced with the caveat that he could not "prejudge" what the committee will do when it looks at interest rate forecasts in March.
"At the December meeting the median participant called for three rate increases in 2018," Powell said Tuesday in response to a question during his testimony. "Since then, what we've seen is incoming data that suggests a strengthening in the economy and continuing strength in the labor market. We've seen some data that in my case will add some confidence to my view that inflation is moving up to target. We've also seen continued strength around the globe. And we've seen fiscal policy become more stimulative."
But he emphasized this does not mean the forecast will be upgraded. "So I think each of us is going to be taking the developments since the December meeting into account and writing down our new rate paths as we go into the March meeting, and I wouldn't want to prejudge that," he said.
Natixis economist Joseph LaVorgna said the Senate questioning could be different, and Powell could be drawn out into a deeper conversation about the economy.
"Powell might be challenged a bit more," said LaVorgna. "I think Powell did a pretty good job. ... He's not going to try to move the markets. ... He doesn't want to do anything to rock the boat. If he repeats his comment, I don't think he's sending a message."