Too Clever by Half?

By Alex Eule |  Monday, March 21 Going Halfway. Stocks were hovering near positive territory early this afternoon, when Federal Reserve Chairman Jerome Powell offered a surprise for investors: He's willing to move in half-point increments as the Fed raises interest rates to fight inflation. The Fed has always moved in quarter-point steps, at least for the last two decades. The last half-point increase came in May 2000, when the target federal-funds rate went from 6.0% to 6.5%.  That it came during the last great stock-market bubble could be seen as a coincidence, but more likely it's a sign that the Fed is particularly worried about an overheating economy and feels an urgency to get inflation under control.  Barron's Alexandra Scaggs has the key quote from Powell, which came during a conference hosted by the National Association for Business Economics: He then elaborated, saying that a 50-point increase is “not a decision that we’ve made. What I’ve said is that if we think it’s appropriate to raise 50 basis points at any meeting or meetings, then we will do so. I don’t have a test here for what will trigger that,” he said. “The expectation going into this year was that we would see inflation peaking in the first quarter and maybe leveling out and then seeing a lot of progress in the second half. That story has already fallen apart. To the extent that it continues to fall apart, my colleagues and I may well reach the conclusion that we’ll need to move more quickly, and if so we’ll do so.” Stocks fell on the news, with the Dow Jones Industrial Average off as much as 400 points around 1:30 p.m. It closed down 202 points, or 0.6%. Investors quickly recalculated the next rate increase, which is all but certain to come at the Fed's May meeting. According to Fed futures trading, the odds for a half-point hike in May went from a 44% chance on Friday to 64% today. A clear majority of traders now expect rates to finish the year at 2.25% or higher.  Ultimately, though, investors took the rate news in stride. The S&P 500 managed to finish nearly flat, down 0.04%, while the Nasdaq Composite was off 0.4%.  The latest Powell comments could, though, raise the bar for future relief rallies, like the type we saw last week when the S&P 500 jumped 6.2%. "The risks of 50-basis-point rate hikes should put a damper on some stock market dip buyers who may have to turn defensive," Edward Moya, senior market analyst at Oanda, wrote today.

 

DJIA: -0.58% to 34,552.99 S&P 500: -0.04% to 4,461.18 Nasdaq: -0.40% to 13,838.46 The Hot Stock: Marathon Oil +8.5% The Biggest Loser: Nielsen Holdings -6.9% Best Sector: Energy +4.0% Worst Sector: Communication Services -0.9%