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Is a 50-basis-point Fed rate increase back in the cards?

Executive summary:

• Expectations for larger Fed rate hike rise after Powell’s remarks
• Fed decision could hinge on latest U.S. labor market and inflation data 
• Eurozone data points to economic slowdown

On the latest edition of Market Week in Review, Equity Portfolio Manager Olga Bezrokov and Sophie Antal-Gilbert, Head of AIS Portfolio & Business Consulting, discussed U.S. Federal Reserve (Fed) Chair Jerome Powell’s recent testimony to Congress and whether the Fed will step up the pace of rate hikes at its next meeting. They also unpacked the latest GDP (gross domestic product) and retail sales numbers from Europe.

Fed may increase pace of rate hikes at March meeting

Bezrokov and Antal-Gilbert started the conversation by digging into remarks made by Chair Powell before the U.S. Congress on March 7-8. Bezrokov noted that ahead of the Fed chair’s comments, markets had largely been pricing in a 25-basis-point (bps) rate hike at the central’s bank March 21-22 meeting. However, in his testimony, Powell stressed that a reacceleration in the pace of Fed rate hikes is still on the table, Bezrokov said, noting that this triggered a sharp fall in markets. In her opinion, it’s very unclear at the moment whether the Fed is leaning toward a 25- or 50-bps rate hike at its upcoming meeting.

“Chair Powell also emphasized that the latest jobs and inflation data will drive the Fed’s decision on the magnitude of the next rate increase, and that too contributed to market volatility,” Bezrokov remarked, explaining that recently released U.S. labor-market data has been running hot. For instance, a report published by ADP on March 7 showed that private payrolls increased by more than anticipated in February—a sign that the Fed’s aggressive tightening campaign hasn’t cooled the labor market to the degree that was expected, she said.

In addition, data released by the Labor Department on March 8 showed that job openings remain very high, at 10.8 million, Bezrokov noted. “This report indicates that U.S. businesses are continuing to hire, despite the barrage of headlines about layoffs in the tech sector,” she stated.

Complicating the situation, weekly U.S. jobless claims for the week ending March 4 rose above 200,000 for the first time since early January, Bezrokov noted. However, she said this number is still fairly low by historical standards, and in particular, lower than what’s generally observed during a labor-market cooldown.

The mixed messages from the jobs market make February’s U.S. employment report, slated to be released March 10, all the more important for the Fed, Bezrokov said. Following January’s blowout number of 517,000 new jobs, economists are projecting a gain of 225,000 nonfarm payrolls for February, she noted.

“If the report comes in strong, which earlier data indicates might be the case, it could increase the chances of a 50-bps hike at the March meeting, while a softer number might shift market expectations back to a 25-bps increase,” Bezrokov explained.

Eurozone economic growth stalls while inflation remains hot

Turning to Europe, Bezrokov noted that the final number for eurozone fourth-quarter GDP growth was revised downward from 0.1% to 0.0%. In other words, the eurozone economy did not grow at all in the final three months of 2022—marking the first time this has happened since the second quarter of 2021, she said. “This is definitely a concern when it comes to the health of the European economy,” Bezrokov remarked. She added that eurozone retail sales data for January, also released the week of March 6, did rebound from a contraction in December, but at a more modest pace than expected.

Despite signs of a slowing economy, inflation continues to be a major concern for the European Central Bank (ECB), Bezrokov said, with consumer prices still up 8.5% on a year-over-year basis. Because of this, the ECB is still widely expected to deliver a 50-bps rate hike at its next meeting, she concluded.

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