Wall Street was hit with a reality check when Jerome Powell's hawkish rhetoric prompted a shift higher in federal reserve rate bets, reigniting recession fears and crushing the riskier sectors of the market.
During a Senate hearing, the Fed's chairman signaled that officials are ready to accelerate tightening and raise rates if inflation remains high. Equities fell precipitously, with the S&P 500 falling back below 4,000. The swap market indicated that a half-point increase in March was more likely than a quarter-point increase, with the projected peak now hovering around 5.6% — a re-calibration cited in a note from market veteran Peter Boockvar titled "a time for advil and a check on the fed funds futures."
Another concerning development was that the US 2-year yield surpassed the 10-year yield by one percentage point on Tuesday for the first time since 1981. Curve inversions occur when short-term rates are higher than long-term rates, and are frequently regarded as potential indicators of a recession. The dollar increased by 1%, causing commodity prices to fall, with oil tumbling by the most since early January.
Some economists interpreted Powell's remarks as a sign that the Fed is more likely to make a larger move at its March 21-22 meeting, though several market observers still expect the central bank to hike rates by 25 basis points. Before the next meeting, policymakers will have a chance to review the February jobs report and an update on consumer prices.