March Rate Cut Appears Off the Table Following Powell Interview

Rates rise 11+ bps following Chair Powell’s weekend commentary. Swap rates/Treasury yields are ~30bps higher over the past two sessions after today’s significant move, largely spurred by Powell’s hawkish 60 Minutes appearance. Rates opened 6-10bps higher on the commentary and rose further following service sector data and comments from Fed speakers Kashkari and Goolsbee, who urged patience as the Fed weighs potential rate cuts. The dollar soared alongside rates, with the US Dollar Index up nearly 1.4% since last Thursday. Meanwhile, equities dropped on the day despite an afternoon rally as the SPX, DJIA, and NASDAQ closed 0.2% – 0.7% lower.

Chair Powell’s “60 Minutes” interview dashes hope of a March rate-cut. Chair Powell re-emphasized warnings against premature rate cuts on 60 Minutes yesterday. He said, “the danger of moving too soon is that the job’s not quite done…the prudent thing to do is…to just give it some time and see that the data continue to confirm that inflation is moving down to 2% in a sustainable way.” Regardless, he maintained the FOMC’s expectation that the Fed Funds rate will fall to 4.60% this year, as he expects inflation to decline. As for March rate cuts, he said, “We’ve said that we want to be more confident that inflation is moving down to 2%…I think it’s not likely that this committee will reach that level of confidence in time for the March meeting.” Following the remarks, chances of a March rate-cut have declined to 16% from 20% last Friday.

US service sector expands at fastest pace since September. The ISM Services Index showed service sector resilience and contributed to today’s yield rally. January’s 53.4 print exceeded estimates and marked the 13th consecutive month of remaining in expansion territory (above 50). Moreover, the index posted its largest MoM gain since last January, climbing 2.9-points from December. Meanwhile, the prices paid index spiked to 64 from just under 57, a concern for the Fed given that higher costs may be passed on to consumers.