Jerome Powell is heading into the 'danger zone'

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By Julia Horowitz • Thursday, September 22

Good morning. In today's newsletter: Unpacking the latest messaging from the Federal Reserve. Plus, Japan intervenes to prop up the yen for the first time in 24 years, and the costs of high inflation are mounting.

US stock futures are struggling to find direction. Markets in Europe dropped in early trading, while stocks in Hong Kong hit their lowest level in more than a decade on Thursday.

🚨 This just in: The Bank of England is raising borrowing costs back to 2008 levels after announcing another half-point interest rate hike. Read more here.

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What's happening now in markets:

▲ Dow futures 30,323 (+0.14%)

▲ S&P futures 3,808 (+0.04%)

▼ Nasdaq futures 11,700 (-0.09%)

▲ US 10-year yield 3.510%

▲ Gold $1,680.50 (+0.29%)

▲ US oil $83.86 (+1.11%)

▲ Bitcoin $19,209.31 (+4.04%)

MARKET DATA AS OF 8:10 AM EDT

MARKET FLASH

Jerome Powell is taking us into the 'danger zone'

When the Federal Reserve started hiking interest rates to combat decades-high inflation, Chair Jerome Powell stressed that the central bank could increase borrowing costs without inflicting too much damage on the economy.

"We feel the economy is very strong and will be able to withstand tighter monetary policy," Powell said in March.

Six months later, Powell is sounding less assured. The Fed announced its third consecutive supersized interest rate hike on Wednesday and indicated that it would continue to be aggressive should inflation remain elevated.

Slower growth and higher unemployment "are all painful for the public that we serve, but they're not as painful as failing to restore price stability and having to come back and do it down the road again," Powell said.

Breaking it down: The central bank didn't go as hard as some investors thought it might. Some had been bracing for the first full-point hike in the Fed's modern history. Yet tucked into the central bank's projections were signs that it plans to stay tough, even if it means pushing the economy into rocky territory.

"The Fed has now entered the 'danger zone' in terms of the rate shock they are throwing onto the US economy," said Peter Boockvar, chief investment officer at Bleakley Financial Group.

The Fed's main interest rate is now set between 3% and 3.25%. Previously, its top policymakers had indicated rates could climb to 3.4% by the end of this year, which would imply the hiking cycle was almost over.

No longer. The Fed is now penciling in rates of 4.4% by the end of the year, which implies more big hikes in the next few months.

At the same time, the Fed has revised higher its expectations for unemployment. It currently expects the unemployment rate to hit 4.4% in 2023, up from a 3.9% estimate in June.

What it means: The Fed isn't going to back down, even if its strong medicine is tough for America's economy to swallow.

"Our view is that a Fed funds rate of 4% is about the highest that the economy would be able to withstand, and the Fed is clearly threatening to raise rates above that level," Mark Haefele, chief investment officer at UBS Global Wealth Management, told clients after the announcement.

It's a message that could roil markets in the coming weeks as Wall Street digests it.

US stocks alternated between gains and losses on Wednesday before ending the day lower. The S&P 500 finished down 1.7%. The US dollar, meanwhile, is continuing its advance.

Paul Donovan, chief economist at UBS Global Wealth Management, told me that volatility is likely to persist because investors aren't sure how the Fed is measuring its success. Plus, many factors pushing up inflation numbers — such as the war in Ukraine and drought conditions — are outside the central bank's control.

"What is going to add to the market uncertainty is the Fed isn't saying what it's trying to do," Donovan said. But it is acknowledging that it could hurt.

VOICES

What soft landing? Bank CEOs are skeptical

"I think policymakers should be prepared for the worst."

JPMORGAN CHASE CEO JAMIE DIMON (IN REMARKS BEFORE CONGRESS)

Watch his testimony here.

NEWS ALERT

Japan intervenes to prop up the yen for first time in 24 years

Japan tried to shore up the value of its currency Thursday for the first time in 24 years by buying yen to prevent it weakening further against the US dollar.

"The government is concerned about these excessive fluctuations and has just taken decisive action," Masato Kanda, Japan's vice finance minister for international affairs, told reporters on Thursday after the rare move.

When asked by a reporter if the "decisive action" meant "market intervention," Kanda responded in the affirmative.

Important context: Thursday's decision marks the first time since 1998 that the Japanese government intervened in the foreign exchange market by buying yen.

Earlier Thursday, the Bank of Japan announced that it would maintain its ultra-loose monetary policy, signaling its resolve to remain an outlier among G7 nations scrambling to raise interest rates to tame inflation.

Why it matters: The action underscores the global effects of the Fed's policy and the US dollar's breakneck rally, which is pushing other currencies lower. That makes it more expensive for other countries to import food and fuel, and fans domestic price increases. (More on that below.)

Inflation in Japan has jumped above the Bank of Japan's target, reaching its fastest annual pace in eight years.

UP NEXT

Darden Restaurants reports results before US markets open. Costco and FedEx follow after the close.

Also today: Initial US jobless claims for last week arrive at 8:30 a.m. ET.

Coming tomorrow: A first look at the latest Purchasing Managers' Indexes for top economies will provide clues on how they're holding up.

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WHAT WE'RE READING AND WATCHING

▸ Wall Street CEOs grilled on China ties by US lawmakers (Bloomberg)
▸ Charts show how central banks are tackling inflation (CNN Business)
▸ Struggling Coinbase tested group to speculate on crypto (WSJ)
▸ America gained 2.5 million new millionaires last year (CNN Business)
▸ Home sales dropped 20% in August from a year ago (CNN Business)
▸ Credit Suisse weighs splitting investment bank into three (FT)

FINAL WORD

The costs of high inflation are mounting

Central banks are hammering home that they will do whatever it takes to get inflation under control. In the meantime, leaders and policymakers are warning that failure is not an option.

Kristalina Georgieva, the chief of the International Monetary Fund, told CNN's Christiane Amanpour on Wednesday that there will be "people on the street" globally unless steps are taken to protect those most exposed to the consequences of rising prices.

"If we don't bring inflation down, this will hurt the most vulnerable, because an explosion of food and energy prices for those that are better off is inconvenience — for the poor people, tragedy," Georgieva said. "So we think of poor people first when we advocate for attacking inflation forcefully."

Central banks have "no choice" but to increase interest rates in an effort to combat inflation, she added.

"The critical question in front of us is to restore conditions for growth, and price stability is a critical condition," Georgieva said.

Big picture: Georgieva's comments are a reminder of the real-world consequences of the decisions policymakers are weighing right now. But the rapid run-up in interest rates could cause global harm, too.

"As central banks across the world simultaneously hike interest rates in response to inflation, the world may be edging toward a global recession in 2023 and a string of financial crises in emerging market and developing economies that would do them lasting harm," the World Bank said in a recent report.