S&P 500 trades lower after Jerome Powell’s testimony

Stock prices for most US companies dropped lower on Tuesday after the US Federal Reserve chair appeared before Congress during the first day of the monetary policy testimony. The S&P 500 plunged by 1.53% on Tuesday, while the Treasury yield inversion reached the steepest level in over four decades.

US stocks plunge after Jerome Powell’s testimony

The three largest stock indexes across the United States lost over 1% at the close of the market amid a market sell-off. Investors were selling to lower risk as they reacted to the remarks made by Powell about the US economy and the monetary policy actions that the Fed could take in the coming months.

While stocks dropped, the US dollar showed renewed strength, while the inversion between short and long-term treasury yields eased. The price of crude oil also dropped as the Fed Chair reiterated that the institution was committed to lowering inflation levels to the 2% target rate.

The losses seen in the US stock market extended to the European market as the pan-European STOXX 600 index dropped by 0.77%. The MSCI tracking stocks around the world also dropped by 1.46%.

The stocks in emerging markets also dropped 0.87%, while Japan’s Nikkei increased by 0.25%. The benchmark Treasury yields dropped after the statement made by Powell, while the benchmark ten-year notes also reported a slight increase.

The US dollar gained in value after Powell’s remarks, climbing to the highest level since early January after Powell reiterated that the Fed would maintain a hawkish monetary policy to bring the inflation levels down. The greenback performed well against major currencies such as the Japanese Yen and the Sterling.

Fed to maintain a hawkish monetary policy

An investment strategy analyst at Baird in Louisville, Kentucky, Ross Mayfield, said that the events seen in the stock market during the day were “a pretty classic risk-off day.” Mayfield added that the statement about the possibility of more hikes being on the way was enough to make investors dump risk assets, given the turbulence seen in 2022.

While giving his testimony, Powell noted that the recently released robust economic data, especially in the labor market, and the failure of inflation levels to go down increased the possibility of the Fed hiking the interest policy rate more aggressively.

In the last Federal Open Market Committee (FOMC) meeting, the Fed hiked interest rates by 25 basis points. However, most financial markets now expect the rates to increase by 50 basis points to the target rate made by the Fed after the end of the Federal Reserve meeting in March.

The recently released inflation data indicated that the level remained significantly above the Fed target. Therefore, there are concerns from investors that if the Fed continues to hike rates by higher margins and for a prolonged period, the US economy could enter into a recession. Therefore, a hawkish monetary policy is driving investors away from risk assets.