Dow falls over 200 points as U.S. stocks hit session lows after Fed Powell said the peak policy rate may be higher

What’s driving markets

U.S. stock indexes swung in choppy trade following Fed Chair Powell’s remarks during an interview with David Rubinstein, the co-chairman of private-equity giant The Carlyle Group, at the Economic Club of Washington, D.C.

“The disinflationary process, the process of getting inflation down, has begun and it’s begun in the goods sector, which is about a quarter of our economy,” said Powell. “But it has a long way to go. These are the very early stages.”

The three major U.S. stock indexes at first posted gains, then swung to losses before rallying again after Powell reiterated that more interest-rate hikes will be necessary, and surprisingly strong economic data like last Friday’s employment report could force the central bank to raise its policy interest rate more than investors have priced in.

“The reality is we’re going to react to the data, so if we continue to get, for example, strong labor market reports or higher inflation reports, it may well be the case that we have do more and raise rates more than is priced in,” Powell said.

See: Powell says jobs report shows Fed needs to keep raising rates, but he expects ‘significant’ slowdown in inflation

Last week, the U.S. Labor Department reported a 517,000 surge in nonfarm payrolls, as well as a drop in the unemployment rate to 3.4%. Traders projected an over 70% probability that the rate will peak at 5-5.25% by May, followed by almost 50 basis points of cuts by the end of 2023, according to the CME’s FedWatch tool.

“Today’s comments do nothing to undermine the recent strength in the market,” said David Russell, vice president of market intelligence at TradeStation. “They also seem to keep us on track for another 25 basis points in March, with possibly no more increases after that. It’s a potential Goldilocks environment for the bulls and a very tough spot for the bears.”

In the news conference following the FOMC decision last Wednesday, Powell acknowledged for the first time that “the disinflationary process” is under way. Yet he admitted the Fed needs to see “substantially more evidence” that price pressures are evaporating.

However, Russell said Powell’s remarks on Tuesday means he refrained from walking back his disinflation comment. “If anything, he reiterated it in a guarded way,” which gives investors breathing room for the next few weeks as they wait for more data.

Neel Kashkari, president of the Minneapolis Fed, set the stage Tuesday with calls to raise rates aggressively. Kashkari, who spoke in a CNBC interview, is a voting member of the Federal Open Market Committee, which sets the benchmark interest rate.

On Monday Atlanta Fed President Raphael Bostic told Bloomberg that the jobs report means interest rates may have to rise more than he’s previously forecast. Bostic is not an FOMC voting member.

Besides the Powell speech on Tuesday, Fed Vice Chair for Supervision Michael Barr is also scheduled to speak Tuesday at 2 p.m. ET also.

Then there’s President Joe Biden’s State of the Union address Tuesday evening. Engelke is hoping for conciliatory statements from Biden on bipartisan work to raise the debt ceiling, but he’s not holding his breath.

Meanwhile, U.S. data on international trade showed America’s trade deficit hit a record $948.1 billion last year. It’s the third straight year for an all-time deficit, with the trade gap widened by steep oil prices and steep consumer appetite for new cars, cell phones and other products. The 2022 deficit is a 12% increase from 2021’s trade deficit. Data on U.S. consumer credit is also expected Tuesday afternoon.

The corporate earnings reporting season continued Tuesday too. So far this season, a little over half of S&P 500 companies have reported earnings, with about 69% surpassing expectations, according to FactSet data.

Companies in focus

• Bed Bath & Beyond shares slumped more than 46%, after seeing strong gains Monday before the retailer said it plans to sell convertible preferred stock as well as warrants to purchase common shares and convertible preferred stock in a move to raise at least $225 million initially and ultimately more than $1 billion.
• Hertz Global Holdings  gained more than 8% after the car rental company reported fourth-quarter profit that dropped from last year but topped expectations, aided by a post-pandemic demand recovery. 
• DuPont de Nemours Inc. shares were up 6.8% after the chemical company beat fourth-quarter estimates, even though forward guidance didn’t live up to analyst expectations. For this year’s first quarter, Du Pont is expecting adjusted EPS of 80 cents and sales of $2.9 billion, while FactSet consensus called for EPS of 88 cents and $3.1 billion in sales.
• Royal Caribbean Group shares rose 6.4% after the cruise operator reported a smaller-than-expected fourth-quarter loss and a rosy outlook for 2023.  “Leisure travel strength continues as consumer spend is shifting towards experiences, with cruising remaining an attractive value proposition,” said Chief Executive Jason Liberty.

— Steve Goldstein contributed to this report