Will's speech was unexpectedly hawkish, and expectations of a 50 basis point rate hike in March rose to over 50%

On the morning of March 7 local time, U.S. Central Bank Chairman Powell delivered a semi-annual monetary policy testimony in the Senate. Powell said that due to persistent inflation, the Federal Reserve may continue to tighten monetary policy, and may do so faster than previously expected, which is an unexpectedly aggressive stance after the pace of interest rate hikes slowed last month.

“The latest economic data have been stronger than expected, suggesting that the ultimate level of interest rates could be higher than previously thought,” Powell told the Senate Banking Committee. “We would be prepared to increase the pace of rate hikes at a faster pace if the overall data suggest a more rapid pace of tightening is warranted.”

The comments seemed to suggest the Fed could implement a larger rate hike than the 25 basis point increase it made last month at its next policy meeting on March 21-22.

After Powell's comments, traders bet on the probability of a 50 basis point rate hike in March rose to 51.3%, up from 31.4% a day earlier and 9.2% a month ago, according to CME Group's FedWatch rate forecasting tool. Previously, the market generally expected the Fed to maintain the 25 basis point rate hike it adopted on February 1, slowing down its aggressive rate hike measures in 2022.

In addition, traders currently expect the peak of the benchmark interest rate (the final value of the interest rate) to reach a range of 5.5%-5.75% in the summer. In the December estimate, Fed officials set the final rate at 5.1%.

Key recession indicator flashes warning sign

Crypto and stock markets fell sharply after Powell's speech, and U.S. Treasury yields surged.

Bitcoin briefly fell about 1.6% to below $22,000 following the comments. It has since rebounded slightly to $22,100, while the S&P 500 fell 1.4%.

The yield on the 2-year U.S. Treasury bond broke through 5% during the session, reaching its highest level since 2007. The 2-year Treasury bond yield was more than 100 basis points higher than the 10-year Treasury bond yield for the first time since September 22, 1981. The last time the 2-year yield was lower than the 10-year yield was in July last year. CNBC analysts said that for half a century, the inverted yield curve has been an accurate signal of an impending recession.

10-year Treasury bonds typically offer higher returns than shorter-term notes because investors are committing their money for a longer period of time. Shorter-term Treasury bonds, such as 2-year or 3-year bonds, typically offer lower yields because the risk is more predictable than in the long term.

However, when the return on the 10-year Treasury bond is lower than that on the 2-year Treasury bond, it indicates that investors are pessimistic about the outlook and are reluctant to invest money.

Economists have long viewed an inverted yield curve as a reliable signal of an impending recession. According to research by the Federal Reserve Bank of San Francisco, an inverted yield curve has preceded every U.S. recession since 1955.

Powell says Fed 'still a long way' from goal of curbing inflation

The Fed began aggressively raising the federal funds rate a year ago, and the rate is currently in a range of 4.5% to 4.75%. Even so, the U.S. economy has shown extraordinary resilience. Employment increased by more than 1 million in the three months to January, and the personal consumption expenditures index, the Fed's preferred inflation indicator, rose 5.4% in the 12 months to January. Consumption and inflation data point to persistent price pressures.

Powell also stressed that the central bank still has some way to go before it can declare victory over inflation.

In his Senate testimony, he noted that despite the Fed's rate hikes and attempts to cool economic growth, the labor market remains "extremely tight." "We are far from our price stability mandate, and actual economic data have exceeded most estimates of maximum employment," he said.

Senate Democrats are cautious about accelerating interest rate hikes. Senior Democratic Senator Elizabeth Warren said at the meeting that if the unemployment rate rises to the Fed's forecast of 4.6% by the end of the year, 2 million people will be unemployed. She asked Powell: "How would you explain your view that the unemployment rate is needed?"

Powell argued that all Americans are suffering under the weight of rising prices. Inflation is very high and it is hurting the American people badly.

He responded: “If we abandon this job and let inflation run at 5-6%, will working people be better off?”

The U.S. non-farm sector added 517,000 jobs in January 2023, and the unemployment rate was 3.4%, the lowest level in 54 years. The Labor Department is scheduled to release February hiring on Friday and February inflation report next week, which will provide guidance for new monetary policy. Powell said: "Before the FOMC (Federal Open Market Committee) meeting, we do have two or three very important data releases to analyze, which are very important for us to evaluate these relatively new data."