Nearly every time Fed Chairman Jerome Powell has spoken over the past year, he has been hawkish. Yet investors continue to act surprised when Powell is neither dovish nor receptive to the idea that the Fed should be cutting rates.
I won't bother telling you not to fight the Fed because I'm sure you've heard that line about a thousand times in the past 24 hours. However, a quick glance at the CME Group's FedWatch Tool makes it abundantly clear that investors are preparing themselves for another push higher in rates.
The current target fed funds rate is 450-475 basis points. One month ago, traders placed around a 9% chance that the Fed would lift rates by one-half percentage point to between 500-525 basis points at the March 22 meeting. While those odds had increased to more than 31% as of Monday of this week, the market still mainly was betting on a 25-basis-point hike.
But look at where the 50-basis-point rate projection jumped after Powell's testimony before Congress on Tuesday -- to nearly 70%. You may disagree with Powell's assessment of inflation and the need for higher rates, but if traders' expectations are to be believed, the odds have shifted firmly in the direction of a 50-basis-point hike two weeks for now.
Let's set interest rates aside for a moment to talk about transitory inflation. This time last year, the Fed was banging the table that inflation soon would revert to 2% or 3%. While many investors thought the Fed was wrong in its belief that inflation was transitory, it took Powell and his cohorts months to change their thinking. Their view was that inflation was being pushed higher in the short term but that it soon would return to a more acceptable level.
The Fed's past misstep in gauging inflation brings up another question.
Suppose this Friday's employment data show another surprisingly strong labor market. In that case, we might see folks fret over an increasingly likely 50-basis-point hike and the potential for that hike to tip the scales from a soft landing to something more painful. With rates possibly heading toward 6% from near zero one year ago, at what point do we begin questioning the logic and likelihood of a soft landing or shallow recession?
Regarding yesterday's price action in the major market ETFs, with the SPDR S&P 500 ETF (SPY) and Invesco QQQ Trust (QQQ) back under their 21-day exponential moving averages (EMAs) and the iShares Russell 2000 ETF (IWM) under the 50-day EMA and year-to-date volume-weighted average price (VWAP), long-only traders for now should be back on defense observing most of the price action from the sidelines.
