Powell's Interest Rate Remarks Trigger Thursday Roller Coaster: What Did Fed Chair Say?

In a nail-biting hour of twists and turns, the financial markets took a wild ride as Federal Reserve Chair Jerome Powell sat for an interview with Bloomberg during an event organized by the Economic Club of New York.

Powell’s remarks on Thursday afternoon triggered shifts among stocks, currencies and bonds echoing the market responses typically seen following his press conferences following Fed rate-setting meetings.

Powell struck a cautious tone, emphasizing that the Fed is proceeding carefully by looking at incoming data, the evolving economic outlook, and the balance of risks.

Economic growth has been better than expected, Powell explained, citing strong consumer demand. Recent geopolitical tensions, however, pose significant risks to global economic activity.

At first, this led market participants to believe that the Fed might be considering a halt to the ongoing interest rate hikes. Market-implied probabilities assigned a 96% chance of the Fed keeping rates steady on the Nov. 1 meeting.

‘Rates Aren’t Tight Enough’

The narrative took an unexpected turn when Powell entered the Q&A session with Bloomberg’s David Westin.

Powell stated that the economy is handling high interest rates and that the evidence does not suggest that the current policy is too tight. He further underscored that the risk of high inflation remained a concern.

These remarks triggered apprehension among investors, who began to worry that the Federal Reserve might have further interest rate hikes in store. This concern pushed Treasury yields higher.

The yield on the benchmark 10-year Treasury note surged to 5% during Powell’s interview, while the yield on the longer-dated 30-year bond reached 5.10%.

Powell also asserted that the Fed needed to allow the rise in yields to play out and should only monitor the situation.

Chart: Treasury Yields Rose As Powell Delivered Hawkish Remarks

Powell Softened His Stance

Powell doubled down on his stance, admitting that higher bond yields were contributing to the desired tightening of financial conditions.

In a subtle but significant move, Powell also indirectly commented on the risks associated with U.S. fiscal policy and the government’s substantial deficit. He remarked that it was widely known that the current fiscal trajectory was “unsustainable.”

Market sentiment showed signs of slight relief only when Powell hinted that the rise in Treasury yields might reduce the need for further interest rate hikes. However, uncertainty still loomed as investors weighed the implications of his comments.

The SPDR S&P 500 ETF Trust SPY managed to partially trim daily losses as of 1:38 p.m. in New York.

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