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Stock markets slump as Powel warns of Fed returning to big rate rises

FTSE  Federal Reserve Chair Jerome H. Powell testifies before a U.S. Senate Banking, Housing, and Urban Affairs Committee hearing on
FTSE lost steam as Jerome Powell's testimony began. Photo: Kevin Lamarque/Reuters

The FTSE 100 and European stocks finished mostly lower this Tuesday as investors heard Federal Reserve chair Jerome Powell warn of a return to big rate rises.

The FTSE 100 (^FTSE) lost 0.10% to finish at 7,922 points, while the CAC 40 (^FCHI) in Paris lost 0.40% to 7,344 points. In Germany, the DAX (^GDAXI) lost 0.57% to 15,562.

The Federal Reserve will likely need to raise interest rates more than expected in response to recent strong data and is prepared to move in larger steps if the "totality" of incoming information suggests tougher measures are needed to control inflation, Fed Chair Jerome Powell warned.

"The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated," Powell said in prepared remarks for a hearing before the Senate Banking Committee.

The Dow Jones (^DJI) lost 0.76% to 33,176 points. The S&P 500 (^GSPC) retreated 0.90% to 4,012 points and the tech-heavy NASDAQ (^IXIC) slipped 0.64% to 11,601.

The US Federal Reserve began an aggressive campaign to raise interest rates a year ago, moving to a range now of 4.5% to 4.75%.

However, Powell said: "It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation."

Warning that the "ultimate level of interest rates is likely to be higher", he added: "To conclude, we understand that our actions affect communities, families, and businesses across the country."

Powell rounded off his prepared testimony to Congress by warning of the risks of relaxing monetary policy too quickly.

"Restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the longer run," he said.

The historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done."

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Andrew Hunter, deputy chief US economist at Capital Economics, said: "Fed Chair Jerome Powell appears to have confirmed today that interest rates are set to rise a higher than we previously anticipated.But with most evidence still pointing to economic weakness and lower inflation this year, we still suspect the Fed will begin cutting rates again sooner than the markets are now expecting."

Richard Carter, head of fixed interest research at Quilter Cheviot, cautioned that the markets got carried away by predictingthat the Fed would ‘pivot’ away from higher rates soon.

He said:“As the economic data continues to paint a US economy in rude health, it has become clear that markets got somewhat ahead of themselves on talks of interest rate pauses and potential pivots to rate cuts. Jerome Powell has poured cold water on the idea that Fed is ready to change tack and reiterated the need for bigger interest rate rises if they are required.“Indeed, data has shown that while inflation peaked at the end of last year, its downward trajectory has not been quite as swift as market participants would have liked. This sticky inflation means interest rate rises will remain on the table for as long as employment remains robust.

Neil Wilson of Markets.com warned the market is hearing the "higher for longer" message loud and clear.

He said: "So, Fed will go higher and for longer – but also might get to what it thinks the peak might be at a swifter pace.Think we see 50bps very much back on the table for the next couple of meetings – the potential to increase the pace of tightening again is noteworthy and probably the chief cause of the market reaction - bonds had kinda already accepted higher and longer."

In London, shares of Ashtead Group (AHT.L) rose 2.12% after the company forecast annual results ahead of its estimates and also raised capital spend outlook for the next year.

Across the wider FTSE 250 index, John Wood Group (WG.L) jumped 13.50% after it revealed it had rejected a fourth bid approach from Apollo Global Management (APO) valuing the firm at 237p per share.

“The board believes this latest proposal continues to undervalue the group and is therefore minded to reject,” the company said.

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“The board will continue to engage with its shareholders and intends to engage further, on a limited basis, with Apollo,” it added.

Meanwhile, Brent crude (BZ=F) slipped and was trading at around $84/barrel.

In Asia, Tokyo’s Nikkei 225 (^N225) climbed 0.25% to 28,309 points, while the Hang Seng (^HSI) in Hong Kong lost 0.33% to 20,534. The Shanghai Composite (000001.SS) also edged lower, slipping 1.11% to 3,285 points.

Watch: Fed Chair Powell suggests further rate hikes given stronger-than-expected economic data

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