Powell: "March Rate Hike Depends on Data... Final Rate May Exceed 5.5%"

Strengthening Outlook for Big Step Pivot... Employment Report and CPI Are Key

Jerome Powell, Chair of the U.S. Federal Reserve (Fed), stated at the March Federal Open Market Committee (FOMC) meeting that the size of the interest rate hike has not yet been decided and depends on upcoming economic indicators. Amid growing expectations of a big step (a 0.5 percentage point increase in the benchmark interest rate), Powell also left open the possibility that the terminal rate could rise above 5.5%. The February employment report and Consumer Price Index (CPI), to be released this week and next, are expected to be key factors.

[Image source=Reuters Yonhap News]

At a House Financial Services Committee hearing that day, Chair Powell said, "We have not yet made any decisions regarding the March meeting." He explained, "The terminal rate could be higher than we previously expected," but added, "There are important indicators such as the CPI before the March FOMC. There is no predetermined path; it will depend on incoming data and forecasts."

When asked whether the terminal rate could exceed 5.5%, he replied, "Based on the data so far, it could go higher." However, he also noted that additional data to be released before the March FOMC means nothing is set in stone yet. So far, the Fed has raised U.S. interest rates to the highest level since 2007, between 4.5% and 4.75%, through a tightening cycle that began in March last year. Powell’s remarks suggest that an additional rate hike of at least 1 percentage point is possible. This far exceeds the median year-end rate forecast of 5.1% shown in the Fed’s dot plot released in December last year. The Fed is also expected to release a new dot plot reflecting this tightening outlook immediately after the March FOMC.

Powell, who appeared before the Senate the previous day and said, "The terminal rate could be higher," and "We are prepared to raise the pace of rate hikes," repeated the same statements that day. He confirmed, "If the overall data direction indicates a need for faster tightening, we are prepared to increase the pace of rate hikes." He also pointed out that although inflation is easing, it remains at a very high level, citing an overheated labor market as the reason.

Private employment data released before the market opened also adds weight to the tightening outlook. According to the ADP National Employment Report, U.S. private sector employment increased by 242,000 in February, exceeding the Dow Jones expert forecast of 205,000. The wage growth rate for February was 7.2% year-over-year, slightly down from 7.3% in January but still at a high level. On the same day, the U.S. Department of Labor released the January Job Openings and Labor Turnover Survey (JOLTS), showing 1,082,000 job openings in January, surpassing the market forecast of 1,058,000. The ratio of job openings to unemployed persons remained steady at 1.9, the same as the previous month.

These indicators suggest that despite a year of aggressive rate hikes, the U.S. labor market remains strong. Powell also reiterated his assessment that "the labor market is extremely tight."

The key will be the employment report to be released on the 10th. Currently, Wall Street expects nonfarm payrolls to increase by 225,000 in February, with the unemployment rate at 3.4%. If the employment report again exceeds expectations as it did last month, the Fed’s tightening pace is likely to accelerate further. The Fed’s Beige Book, which contains economic assessments, will also be released that afternoon. Following that, the February CPI and retail sales data will be announced next week.

Market expectations for a big step have strengthened. After slowing the pace to the usual 0.25 percentage point increase earlier this year, the Fed is now expected to return to a 0.5 percentage point hike within a month. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds (FF) futures market currently prices in about a 78% chance that the Fed will raise rates by 0.5 percentage points at the March FOMC. This is a sharp increase from around 9% a month ago and 29% a week ago. It is even higher than the 69% level seen the previous day when Powell’s Senate testimony heightened tightening concerns. Year-end terminal rate forecasts are also converging around 5.5% to 5.75%. Goldman Sachs raised its terminal rate forecast to 5.5%?5.75% following Powell’s remarks the day before.

Some in the market are even forecasting rates in the 6% range. Rick Rieder, Chief Investment Officer (CIO) at BlackRock, recently noted the resilience of the U.S. economy and predicted, "There is a possibility that the Fed will raise rates to 6% and maintain them at that level for an extended period."