Understanding market reaction to Powell's Senate testimony

Stock futures were little changed on Wednesday, a day after comments by Federal Reserve Chairman Jerome Powell indicated that interest rates may need to go higher for longer, spurring a broad market selloff.

Dow Jones Industrial Average futures ticked 10 points higher. S&P 500 and Nasdaq 100 futures were up about 0.1% each.

A stronger than expected February private salary report suggested the economy is holding strong despite the Fed’s hiking campaign, adding to investor concerns that bigger interest rate hikes could be in the offing.

The Dow closed nearly 575 points lower on Tuesday. The S&P 500 slid 1.53% to close below the key 4,000 threshold, and Nasdaq Composite lost 1.25%. The sharp decline in stocks was accompanied by a peak in bond yields, with the yield on the 2-year Treasury exceeding 5%, reaching the highest level since 2007.

The shake-up in the markets came after Fed Chairman Powell spoke before the Senate Banking, Housing and Urban Affairs Committee. He warned lawmakers that the central bank’s terminal rate is likely to be higher than previously expected due to persistently high economic data in recent weeks.

“(Powell) is very, very clear that if you look at what’s happened over the last year and a half, the call for inflation didn’t pan out,” Morgan Stanley’s global chief economist Seth Carpenter said on CNBC:Final clock: Overtime.”

“I think Powell is now very much on board with the idea that he doesn’t want to get caught flat-footed again, and opening the door wide for a 50-point hike is exactly what he did,” Carpenter added.

On Wednesday, investors will be closely watching how Powell speaks before the House Financial Services Committee. Separately, Richmond Fed President Tom Barkin will also address the labor market Wednesday morning. January’s job vacancies and information on labor turnover will also come.