Banking, Energy Stocks Take Turn For The Worse As Powell Talks Inflation With Senators Who Are Concerned About Job Losses

On the second day of Congressional testimony by Fed Chair Jerome Powell, the market indexes showed mixed signals, but key interest rate-sensitive sectors responded negatively.

Powell’s comments before the Senate Banking Committee foreshadowing a possible new hike of 0.5% later this month didn't sit well with investors, who were pricing in a 0.25% increase, expecting the Fed would repeat the same rate increase made in early February.

Reich Against 0.5% Hike In March: Robert Reich, former labor secretary under Bill Clinton, said that raising interest rates higher than expected would be a big mistake.

"It completely puts the burden of inflation on lower-wage workers and the poor," the political commentator said on Twitter. Reich also worked under Jimmy Carter, Gerald Ford and Barack Obama.

In a blog post Tuesday, Reich criticized the approach to continue to raise rates as spending continues to thrive, and insisted that "the Americans who are doing most of the spending are not the ones who will be hit hardest by the rate increases."

While the top fifth of the income ladder is doing the spending that's driving the current economic resilience, the bottom fifth would be where job losses would be seen if the economy slows, he said.

In his view, there's no need to continue to raise interest rate hikes, as inflation is already winding down, and he said being fixated on a 2% goal could end up hurting more than it heals.

"Why not 4%? Getting inflation down to 2% is going to cause too much pain for the most vulnerable," he wrote.

Unemployment has been a major focus among senators from both parties, including Democrat Elizabeth Warren and Republican John Kennedy, who expressed concern for the possibility of 2 million people losing their jobs this year on account of increased interest rates.

On Tuesday, the S&P 500 fell by 1.5%, the Nasdaq Composite dropped 1.3% and the Dow Jones Industrial Average lost 1.7%. 

While Powell said that no decision has been made yet, he laid open the possibility of tightening the pace of interest rate hikes should the economy continue to remain stronger than what's needed to reach the Fed goal of 2% inflation.

On the second day of the semiannual monetary policy report, Powell reiterated the Fed's plans to continue to hike interest rates until inflation winds down. A jobs report on Friday and a CPI report next week will be key to understanding the pace of the next hike, he said.

The Market Responds To Powell’s Inflation Remarks: The S&P 500 is down 0.3% at the time of writing Wednesday but has turned positive several times since markets opened.

The Dow Jones is down 0.6% while the Nasdaq Composite remains relatively flat.

Interest-sensitive sectors reacted badly to the news of a continuing hawkish stance by the Fed.

The banking sector took a turn for the worst following Powell's remarks:

• Bank of America Corp BAC fell 1.6%. 
• JPMorgan Chase & Co JPM lost 1%.
• Wells Fargo & Co WFC dropped 1.8%.

ETFs providing exposure to banking followed the same path. 

• Invesco KBW Regional Banking ETF KBWR was down 1%.
• SPDR S&P Regional Banking ETF KRE also lost 1%.

Some mortgage stocks were rising.

• Rocket Companies, Inc. RKT was up 0.8% despite of Powell's comments.
• UWM Holdings Corp UWMC was up 01.%

Others were turning lower.

• Essent Group Ltd ESNT was down 0.5%.
• Discover Financial Services DFS was down 1.3%.

The energy sector responded negatively to Powell's comments.

• Fidelity MSCI Energy Index ETF FENY was down 1.4%. 
• Exxon Mobil Corp XOM was down 1.5%. 
• Chevron Corporation CVX was down 1.1%

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