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08.02.2023 12:47 PM
Powell stresses the need for further interest rate hikes

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Fed Chairman Jerome Powell held on to his view that interest rates should continue to rise in order to suppress inflation. He also suggested that borrowing costs could peak higher than expected.

The statement was similar to what he said last week, but at that time markets ignored his warning as they did not anticipate a strong labor market data.

Now that everyone has seen the latest employment report, that is, non-farm payrolls rose by 517,000, while unemployment fell to 3.4%, it is clear where the Fed is headed and why it is not going to cut rates.

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"We think we will need further rate hikes," Powell said. "The labor market is unusually strong. If it overheated, then we have to do more," he added.

Bonds sold off after Powell's speech as it opened the door for a higher peak rate in 2023 if the labor market does not start to cool.

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Last week, the FOMC raised the base rate by a quarter of a percentage point to a range of 4.5% to 4.75%. But now, investors expect the rate to rise above 5%, similar to what Fed officials predicted in December.

Powell argued that easing pressure on the labor market was part of the response to lower inflation in core services other than housing. The Fed was caught off guard by rapid price increases in the final quarter of 2021, when inflation, according to their preferred measure, rose by 5%, which is well above their target. Although some inflation figures have fallen in recent months, the Fed chairman said they need "substantially more evidence" to be confident that inflation is indeed heading downwards.

Andrey Shevchenko,
Analytical expert of InstaForex
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