Fed Narrative Turns More Hawkish

February 21, 2023

Fed Narrative Turns More Hawkish Photo

Years after his tenure as Federal Reserve (Fed) chair, Ben Bernanke observed that “monetary policy is 98% talk and only 2% action.” Last week’s more hawkish comments from Fed policymakers represented another example of coordinated communication now being the policy tool.

After last week’s disappointing inflation reports, St. Louis Fed President James Bullard and Cleveland Fed President Loretta Mester suggested that a 50-basis-point hike had been their preferred choice for Fed action at the recent meeting, rather than the 25-basis-point increase that was approved. Last week’s messaging from the Fed was very different from recent communication by Chair Jerome Powell, who had suggested that the presence of disinflationary forces meant the Fed was likely near the end of its tightening cycle.

Interest rates across the curve moved higher in response to the Fed’s tough talk, with the bond market now giving back the majority of January’s price gains. The prospect of more tightening and an uncertain outlook for earnings are also weighing on equity valuations, as the S&P 500 Index approaches its lowest levels since early February.1 This week’s economic calendar is relatively light but Friday’s Personal Consumption Expenditures Price Index report takes on added significance in light of last week’s inflation data.2



1Source: CNBC- Major Indexes; as of 2/21/23

2Source: MarketWatch- U.S. Economic Calendar; as of 2/21/23

Tags: PCE | Inflation | Federal Reserve | Rate Hike | Economic data | Bond markets

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