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Markets Sink After Powell’s Warning of Long Inflation Fight

“Reducing inflation is likely to require a sustained period of below-trend growth,” the US Fed chair said. The Dow Jones was down 3% and the Nasdaq 4% after his speech


Powell's 'hawkish' determination to rein in inflation suggests the US faces months of slower growth. This file image shows the Federal Reserve Board chairman speaking to the Senate Banking, Housing and Urban Affairs Committee in Washington, January 11, 2022. Brendan Smialowski, pool via Reuters.

 

Global stock markets fell on Friday after a speech by Federal Reserve chair Jerome Powell, in which he said the US economy will need tight monetary policy “for some time” before inflation is under control.

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 labour market conditions,” Powell said.

He did not hint at what the Fed might do at its September 20-21 policy meeting. Officials are expected to approve either a 50- or 75-basis-point rate increase.

The dollar erased early losses to turn positive against a basket of currencies, while gold, which loses appeal as interest rates rise, fell after Powell’s comments.

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,” Antoine Bouvet, senior rates strategist at ING in London, said.

 

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Dow Jones Down 3%, Nasdaq 4%

MSCI’s gauge of stocks across the globe shed nearly 2.5%, 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 Dow Jones Industrial Average fell 1,008.38 points, or marginally over 3%, to close at 32,283.4, the S&P 500 lost 141.46 points, or 3.4%, to finish at 4,057.66 and the Nasdaq Composite dropped 497.56 points, or nearly 4%, to end the session at 12,141.71.

European stocks slid as investors also fretted over downbeat German consumer sentiment data due to rising energy costs.

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 lost 1.7%.

US two-year Treasury yields briefly reached their highest levels since October 2007 before stabilizing near two-month highs after Powell’s comments. It was last up 1 basis point at 3.3824%, while 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 currency markets, the dollar erased early losses against a basket of currencies following Powell’s remarks to trade up 0.3% at 108.8.

The euro, which had edged higher following a report that some European Central Bank policymakers want to discuss a 75-basis-point interest rate hike at their September policy meeting, gave up those gains to trade down 0.07% at $0.9965.

Oil prices ended higher on Friday, boosted by signals from Saudi Arabia that OPEC could cut output, but trading was volatile as investors digested and ultimately shrugged off the Fed’s warning on economic pain ahead.

Brent crude futures rose $1.65 to settle at $100.99 a barrel. US West Texas Intermediate (WTI) crude futures rose 54 cents to settle at $93.06 a barrel.

Spot gold was at $1,736.813 per ounce, down 1.2%.

 

  • Reuters with additional editing by Jim Pollard

 

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Jim Pollard

Jim Pollard is an Australian journalist based in Thailand since 1999. He worked for News Ltd papers in Sydney, Perth, London and Melbourne before travelling through SE Asia in the late 90s. He was a senior editor at The Nation for 17+ years and has a family in Bangkok.

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