Dow slid back 42, decliners slightly ahead of advancers & NAZ retreated 193. The MLP index added 1+ to the 227s & the REIT index was off 2+ to the 366s. Junk bond funds drifted lower & Treasuries had selling bringing higher yields (more below). Oil went up 1 to the 72s & gold fell 6 to 1941.
AMJ (Alerian MLP Index tracking fund)
Federal Reserve Chair Jerome Powell affirmed that more interest rate increases are likely ahead until additional progress is made on bringing down inflation. Speaking a week after Federal Open Market Committee officials decided for the first time in more than a year not to push rates higher, the central bank leader indicated that the move likely was just a brief respite rather than an indication that the Fed is done hiking. “Nearly all FOMC participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year,” Powell said in prepared remarks for testimony he will deliver to the House Financial Services Committee. Following last week's 2-day FOMC meeting, officials indicated they see rate increases totaling 0.5 percentage point thru the end of 2023. That would indicate 2 additional hikes, assuming qtr-point moves. The Fed's benchmark borrowing rate is currently pegged at 5.00-5.25%. Noting that inflation has cooled but “remains well above” the Fed's 2% target, Powell said the central bank still has more work to do. “Inflation has moderated somewhat since the middle of last year,” he said. “Nonetheless, inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go.” Fed officials generally prefer to look at “core” inflation, which excludes food & energy prices. That is showing inflation running at a 4.7% year-over-year rate thru Apr, according to the central bank's preferred measure of personal consumption expenditures prices. The core consumer price index for May was at 5.3%. Powell affirmed that more interest rate increases are likely ahead until additional progress is made on bringing down inflation. Speaking a week after Federal Open Market Committee officials decided for the first time in more than a year not to push rates higher, the central bank leader indicated that the move likely was just a brief respite rather than an indication that the Fed is done hiking. “Nearly all FOMC participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year,” Powell said he will deliver to the House Financial Services Committee. Noting that inflation has cooled but “remains well above” the Fed’s 2% target, Powell said the central bank still has more work to do.
Powell expects more Fed rate hikes ahead as inflation fight ‘has a long way to go’
The Federal Reserve is exploring ways to move more swiftly when regulators identify issues at banks in the wake of a crisis that roiled the banking sector this spring. Federal Reserve Vice Chair for Supervision Michael Barr said in a panel discussion at the New York Fed that the central bank is looking for ways to be more nimble in its regulatory approach to the banking system before & during financial crises. "We’re not an institution that moves quickly on supervisory issues," Barr said. "We tend to have a culture that makes it difficult for the institution to act quickly with respect to supervision" because the Fed tends to be a consensus-driven institution with policymakers looking to ensure they have sufficient evidence for decisions & consider due process issues facing firms, he explained. Barr said he would like to see the Fed act more quickly on potential regulatory issues when the industry isn't in the midst of turmoil and noted, "We’re great in a crisis." He added that while the Fed can stress test banks to see how they would handle a variety of adverse scenarios, a broader "reverse stress test" could be useful to see scenarios that may cause a bank to fail. Barr explained, "Instead of thinking of a stressful scenario and then seeing how it would play through on, say, the balance sheet of a firm, you look at a bank and you say, well, what would it take to break this institution? What are the different ways this institution could die, or a piece of it, a significant piece of it?" "We’re beginning to do that kind of thinking. I’d say we’re pretty nascent in it," Barr added. Although neither Barr nor New York Fed Pres John Williams offered a comment on the economic outlook or monetary policy during the panel, Barr said that the banking system is strong & the issues that hit the global financial system this year appear to be limited to the firms that became distressed. The US banking system experienced 3 of the 4 largest bank failures in its history this spring as a trio of large regional banks collapsed. Their exposure to interest rate risk as the Fed hiked rates to tamp down inflation combined with large amounts of uninsured deposits in excess of the Federal Deposit Insurance Corp's $250K insurance threshold caused a bank run that resulted in their demise
Fed exploring ways to speed up bank oversight, strengthen stress tests
Treasury yields were higher as investors digested Federal Reserve Chair Jerome Powell's testimony before Congress & assessed the economic outlook. The yield on the 10-year Treasury rose by more than 2 basis points at 3.756% & the yield on the 2-year Treasury traded 3 basis points higher around 4.728%. Yields & prices move in opposite directions & one basis point equals 0.01%. Powell affirmed more interest rate hikes are likely ahead as the central bank continues its fight against inflation. That comes after policymakers decided to pause their rate-hiking campaign, which had been ongoing since Mar 2022, at their meeting last week, but not without noting that further rate hikes are likely. 2 more increases of 25 basis points each are expected this year, according to the central bankers. Investors also considered what could be next for the wider US economy, digesting today's housing starts & building permits figures for May, which both came in above previous forecasts.
Treasury yields are little changed as investors await comments from Powell
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