Since last month, I have repeatedly warned that the Federal Reserve was being pressed by circumstances to accelerate its rate hike campaign and pass a 50 basis point hike during the upcoming Federal Open Market Committee meeting. At Tuesday's Senate Banking Committee hearing, Fed Chairman Jerome Powell seemed to agree with me.
"As I mentioned, the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated," Powell said in prepared remarks. "If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes. Restoring price stability will likely require that we maintain a restrictive stance of monetary policy for some time."
On top of jobs gains continuing to come in far hotter than what the Fed expected, the Fed's preferred inflation measure, core PCE, actually rose from December to January, to 7.1% on an annualized basis, far more than three times the Fed's 2% inflation target. Furthermore, minutes from the last FOMC meeting revealed that multiple committee members wanted to raise the federal funds rate by 50 basis points even before the abysmal January data emerged.
Before Powell's appearance on Tuesday, it wasn't just little old me saying a 50 basis point hike was becoming most likely. Mohamed El-Erian, Larry Summers, and Jason Furman all separately made the case. And yet investors — maybe the dumbest class of "experts" in America other than our public health officials — thought until literally today that the Fed was more likely to pass a mere 25 basis point hike later this month.
Following Powell's hawkish speech, the market is now pricing in a >50% chance of a 50 basis-point hike at the next #FOMC meeting — more than double the odds it gave 50bp yesterday.
— Steven Rattner (@SteveRattner) March 7, 2023
The day after the last FOMC meeting, the market wasn't even sure of a 25bp hike. pic.twitter.com/zwR0szOuyI
It's not as though Powell changed his tune during the hearing. He simply spelled out in excruciating detail what he has said for months and what was borne out in the relevant data I and everyone else knows the Fed relies on. Starved from over a decade of easy money, Wall Street — perhaps even more than Congress — continues to hope the Fed will relapse and return to the monetary expansion of days past. But for the umpteenth time, that was an experiment, and that experiment failed. For the Fed, there is no going back.