Powell spooks markets, sending stocks down, dollar up – Following comments made by Federal Reserve Chair Jerome Powell that the U.S. economy will require strict monetary policy “for some time” until inflation is under control, an indicator of international stock markets dipped on Friday while short-term U.S. Treasury yields increased.
In contrast to gold, which declines in appeal as interest rates increase, the dollar recovered early losses to turn positive against a basket of currencies.
Tight monetary policy “for some time” means slower growth, a weaker job market and “some pain” for households and businesses, Powell said in a speech to the central banking conference in Jackson Hole, Wyoming.
“Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions,” Powell said.
He did not hint at what the Fed might do at its upcoming Sept. 20-21 policy meeting. Officials are expected to approve either a 50- or 75-basis-point rate increase.
Interest rate futures tied to expectations about Fed policy fell on Friday moments after Powell’s speech, reflecting increased chances of a third straight 75-basis-point rate hike.
“It was hawkish as expected. Powell’s message is clear: the Fed is far from done in its fight against inflation,” said Antoine Bouvet, senior rates strategist at ING in London.
MSCI’s gauge of stocks across the globe shed 2.47%, its worst day in more than two months. Wall Street’s main indexes fell, with Powell’s comments dragging down megacap growth and technology stocks.
“His comments were hawkish. He’s keeping the pedal to the metal here when it comes to policy to fight inflation,” said Lindsey Bell, chief money and markets strategist at Ally.
The Nasdaq Composite (.IXIC) lost 497.56 points, or 3.94%, to finish the day at 12,141.71, while the S&P 500 (.SPX) lost 141.46 points, or 3.37%, to finish at 4,057.66. The Dow Jones Industrial Average (.DJI) sank 1,008.38 points, or 3.03%, to close at 32,283.4.
European stocks fell as investors worried about pessimistic data on German consumer sentiment brought on by rising energy prices.
Consumer morale in the euro zone’s two biggest economies diverged starkly in August as French consumers benefited from fresh government measures while concerns over rising energy bills hit their German counterparts, surveys showed on Friday.
The pan-European STOXX 600 index (.STOXX) lost 1.68%.
U.S. two-year Treasury yields briefly reached their highest levels since October 2007 before stabilizing near two-month highs after Powell’s comments.
The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, rose on Powell’s comments and was last up 1 basis point at 3.3824%.
The yield on 10-year Treasury notes was up about 1 bps to 3.0334%.
The rise in short-term rates extended the yield curve’s inversion, which is widely seen as signaling an upcoming recession. The closely watched gap between yields on two- and 10-year Treasury notes was at -35 basis points, compared to -31.3 basis points before Powell’s speech.
In the wake of Powell’s comments, the dollar recovered some early losses versus a basket of currencies to close the day’s trading up 0.30 percent at 108.8.
Oil prices rose on Friday, helped by signs from Saudi Arabia that OPEC would reduce supply, but trading was choppy as investors processed and ultimately discounted the Fed’s warning about impending economic hardship.