What stock market investors want to hear when the Fed’s Powell testifies before Congress this week

The stock market’s recovery from last year’s carnage will be tested again as investors closely follow Federal Reserve Chair Jerome Powell’s testimony before Congress this week for clues as to how high interest rates are must rise to win the battle against inflation.

Powell will present the latest mid-year monetary policy and economic report to the Senate Banking Committee on Tuesday and to the House Financial Services Committee on Wednesday. Both hearings begin at 10 a.m. Eastern. Powell’s testimony will likely be his last public statement before the next Federal Open Market Committee (FOMC) policy meeting on March 21-22.

See: Powell to talk to Congress about the possibility of more rate hikes, not less

Fundstrat Research Director Tom Lee expects Powell to reiterate the “data dependency” message in his speech and reiterate market expectations for another 25 basis point hike in the Fed Funds rate at the March meeting.

“Many ‘inflationistas’ say a 50 basis point hike is needed because the January data was so ‘hot’ – that’s the data reactivity of the bond and stock markets, but we expect Powell to stress that rates are now close to neutral so there’s less need to be higher in a hurry, and now the Fed can be data dependent, by the way,” Lee wrote in a note Monday.

Fed fund futures traders have priced in a 69.4% chance of a 25 basis point rise and a 30.6% chance of a 50 basis point rise, according to the CME FedWatch tool. Traders saw only a 3.3% chance of a 50 basis point gain a month ago.

A raft of stronger-than-expected economic data that started in early January, including the January inflation report that showed prices were not falling as fast as the Fed would like and robust employment data, have forced financial market investors to reconsider the Fed’s Away and bet on bigger rate hikes in its next monetary policy meeting.

Fed policymakers retreated to a 25 basis point hike last month after a half point hike in December and four jumbo 75 basis point hikes last year.

St. Louis Fed President James Bullard and Cleveland Fed President Loretta Mester both said last month that they supported a 50 basis point hike Jan. 31 through Feb. 31. 1 meeting. The minutes of the meeting showed that “a few” policymakers had supported the larger move. Neither Bullard nor Mester are voting members of the FOMC in 2023.

Also read: The Minneapolis Fed joined St. Louis and Cleveland in pushing for a 50 basis point hike in the discount rate last month

Fed policymakers may be particularly reluctant to increase the magnitude of rate hikes after the downshift at last meeting, analysts said.

“The move to 50 basis points would be a significant change in policy and a reversal of the slowdown, and quite frankly it would be seen as undermining the Fed’s credibility,” Lee wrote.

See: The stock market faces a crucial test this week: 3 questions that could decide the fate of the rally

Chris Weston, head of research at Australia-based brokerage firm Pepperstone, said in a note on Sunday that Powell is “likely to defend the Fed’s actions” and “likely to pretend they’re doing whatever it takes to bring inflation down to target.” “.

With both the market and the Fed living from data point to data point, Weston said they are still “flying blind” until Friday’s February 13 nonfarm payrolls data and February CPI data February could theoretically see them targeting a terminal rate “north of 6% and requiring 50 basis point increments” to get them there faster, Weston said.

“The market expects some movement from his words, but trading any speech is difficult, so I would be reactive, not anticipatory,” Weston added.

See: Two Wall Street firms expect Friday’s jobs data to come in well above consensus

Economists polled by the Wall Street Journal expect the workforce to rise by 225,000 in February. However, economists at Wall Street banks like Deutsche Bank and Jefferies see the figure well above consensus estimates.

U.S. stocks traded slightly higher on Monday, along with the S&P 500

SPX

and the Nasdaq Composite

COMP

each increasing by 0.2%. The Dow Jones Industrial Average

DJIA

up 0.1%. Last week, the Dow Industrials rose 1.7% for the week, going on a four-week losing streak. According to Dow Jones Market Data, the S&P 500 gained 1.9%, while the tech-heavy Nasdaq gained 2.6%.

Read: Why the February jobs report is unlikely to reverse a January blowout will be revealed in this week’s major economic data