News

Published: Mar 09, 2023
Updated: Mar 09, 2023

Fed Chair's Warning Shakes Global Markets: Interest Rates May Rise Faster and Higher Than Expected

Global financial markets trembled on Tuesday, March 7th, after the Federal Reserve Chair, Jerome Powell, warned that interest rates could increase faster, higher and for longer than anticipated, sending US major indices plummeting. Powell's comments came during his testimony before the US Senate Banking Committee. This article will discuss the potential impact of the Fed Chair's warning, the immediate reactions in the stock and bond markets, and the overall implications for the global economy.

The Stock Market Reacts to Powell's Warning

Powell's words sent shock waves through the US stock market, with the Dow Jones Industrial Average (DJI) falling by 575 points or 1.55%, while the S&P 500 and the Nasdaq Composite lost 1.31% and 1.23%, respectively. The sharp declines were primarily attributed to investors' concerns about the potential increase in borrowing costs and the impact it could have on corporate earnings. However, the sell-off was mostly contained as investors still viewed the overall economic outlook as positive.

Bond Market Reaction: US 2Y Yield Crosses 5% Mark

Powell's warning also had a significant impact on the bond market, with the US 2-year Treasury yield crossing the 5% mark for the first time since July 2007. This rise in the 2-year yield suggests that investors expect the Fed to raise interest rates more aggressively than previously anticipated. The bond market's response is crucial since it signals the long-term outlook for the economy.

Expectations of Fed Rate Hike and Dollar Index

After Powell's testimony, the market had revised its expectations of the Federal Reserve's interest rate hikes. The fed fund rate hike expectations had jumped to 5.61% in July, indicating an increase in the probability of three rate hikes this year, with a potential fourth rate hike in early 2022. The dollar index, which tracks the US currency against a basket of major currencies, rose to 105.60 after Powell's statement, indicating a potential rise in the value of the dollar.

Impact on Metal Prices

Powell's warning also had an impact on metal prices, with gold and silver among the base metals that experienced a decline in their prices. The strong dollar's value, coupled with the expectation of rising interest rates, typically leads to a decline in commodity prices, as investors tend to shift towards higher-yielding assets.

Impact on Indian Markets

The Indian markets are likely to feel the impact of the Fed Chair's warning. The rise in the US 2-year Treasury yield and the potential for higher interest rates could lead to a strengthening of the US dollar. A stronger dollar could make Indian exports less competitive, and the Indian rupee may depreciate further against the dollar, leading to higher import costs for the country.

The Indian bond markets may also face headwinds as global bond yields rise, putting upward pressure on local borrowing costs. Additionally, foreign institutional investors (FIIs) could withdraw capital from the Indian markets as they seek higher returns from investments in the US and other developed markets.

However, it's not all bad news for the Indian markets. A stronger US economy could boost demand for Indian goods and services, leading to higher exports. Additionally, as the Indian economy recovers from the pandemic-induced slowdown, the country could attract more foreign investment, offsetting the outflows from the FIIs.