This morning, the stock market opened on a promising trend before Fed’s Chair; Jerome Powell testified before the United States Congress. Once the testimony took place, the S&P 500 started to decline substantially. The market opened this morning at nearly 4,050 points. As the day moves on, the S&P 500 decreased all the way to 3,985 points, which is a decline of 1.4%. All eleven sectors of the S&P 500 declined, as 29 of the 30 stocks in the Dow. The Dow Jones Industrial Average dropped more than 550 points. This decline was anticipated, however, since patterns are showing that the market tanks once the Federal Reserve is set to make major announcements that will shape financial markets.
Source: Yahoo Finance
Jerome Powell, the Chairman of America’s central bank, announced that there will be possibly a new load of interest rate hikes. This unsurprising news suggests that the cost of borrowing will continue to be expensive for both consumers and producers. Last month, the Federal Reserve raised its benchmark federal funds rate by a quarter-percentage-point to a range between 4.5% and 4.75%. This slowed the pace of rate rises. Powell is convinced that maintaining and even increasing rates higher will continue taming inflation. “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. More importantly, Powell argued that the full impacts of the fed’s interest rate increases haven’t yet been felt in the economy. Based on the data from CME Group, it is possible to see rates being hiked to 0.50% basis points rather than the conventional 0.25%.
Today’s testimony dramatically affected commodity markets, especially gold. Gold fell today after Fed Chair Powell signaled rates would rise further than previously expected and signaled a half-point rate hike. Indeed, Fed-funds futures show that traders see a better -than 60% chance of a half-point hike when policymakers meet later this month. Gold prices fell more than 1% on Tuesday, as the dollar jumped. Gold was down 1.4% at $1,821.41 per ounce while the dollar index gained over 1% following that very same testimony, making bullion less affordable for overseas buyers. The U.S. jobs reports for February are due on Friday. If Friday’s job data shows significant resilience in the U.S. labor market, it would then pave the way for even higher interest rates and could unwind the month-to-date gains garnered so far by gold, according to Han Tan, the Chief Market Analyst at Exinity. Although gold is considered the most standard asset to hedge against inflation, interest rates hollow bullion’s appeal as they increase the opportunity cost of holding a zero-yield asset. Can we expect the market to remain in the red for the rest of the week? Probably, because Powell’s testimony will continue on Wednesday, and it will continue to negatively affect financial markets.