The market response to Powell's testimony was anything but muted

Hello, readers. I'm senior reporter Phil Rosen, writer of Insider's markets newsletter 10 Things Before the Opening Bell.

If you missed Jerome Powell's remarks from his first day on Capitol Hill yesterday, the TLDR is that more rate hikes are coming because the economy's still running hot.

Here's how Powell put it:

"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."

Let's get into how markets, strategists, and traders reacted to the hawkish commentary.

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1. The market response to Powell's testimony was anything but muted. Major indexes all fell more than 1% following comments from the Fed boss, while the 2-year Treasury note jumped to its highest mark since 2007.

Remember, when the Fed raises interest rates, the move influences a range of loan products and it becomes more expensive for companies and individuals to borrow money, which is supposed to cause less spending and generally tighten conditions in the real economy.

The idea is to eventually lower inflation — which most recently clocked in at 6.4% — but the more rate hikes we see, the greater the risk of a recession.

Higher rates also drag on stocks because the higher cost of debt eats into corporate profitability.

They also have the effect of making other investments a more attractive alternative to stocks.

For reference, the 2-year Treasury is yielding nearly as much as the S&P 500 has returned in 2023, all while being a much less risky bet.

So in short: stocks sold off, bond yields jumped, and traders eyed greater potential for a bigger rate hike this month.

"If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes," Powell said.

At the last Federal Open Market Committee decision on February 1, policymakers downshifted to a 25-basis-point hike, which followed a 50-basis-point move in December and three 75-basis-point moves before that.

But Powell's now opened the door to up-shifting to another 50 basis-point move.

Before he spoke on the Hill, traders had been pricing in about 31% odds for a half-point rate hike in March.

Those odds doubled on Tuesday, according to CME's FedWatch Tool.

"Powell just said the quiet part out loud," Callie Cox, US analyst for eToro said Tuesday. "The economy is performing impressively well, but that could complicate the Fed's efforts to bring inflation down."

And John Lynch, chief investment officer for Comerica Wealth Management, said the comments weren't surprising but investors should be taking Powell's "higher-for-longer" warning seriously.

Did anything about Powell's comments yesterday surprise you? What will you be watching for in his statement today? Tweet me (@philrosenn) or email me (prosen@insider.com) to let me know.

In other news:

2. US stock futures struggle to push higher early Wednesday, after tumbling yesterday thanks to the prospect of more hikes. Powell will be speaking again today, this time before a House committee. Here are the latest market moves.

3. Earnings on deck: Adidas, Admiral Group, and more, all reporting.

4. Leading Wall Street firms and analysts have a lot to say about the AI boom. The nascent industry could be worth more than $15 trillion by 2030, according to leading experts. Here's how the pros recommend capitalizing on the new tech wave.

5. Citadel's Ken Griffin made $4.1 billion in 2022. He topped Institutional Investors' rich list for the first time in six years after his flagship fund surged 38% in the 12-month stretch. His 2022 earnings are the highest ever in the history of the rankings.

6. Oil prices are flashing signs that the US will avoid a recession. Benchmark crude prices are an underrated indicator of a downturn, and right now they suggest reason for optimism, according to DataTrek Research: "The risk of a recession over the near term seems quite low."

7. Morgan Stanley is warning investors to brace for US stocks to come crashing down once again. The firm's strategists said the extreme valuations for companies now echo the 2022 bear market — which suggests the "real damage" for this cycle may still be ahead.

8. Dan Lane has interviewed hundreds of real-estate investors. He shared three of his favorite examples from his podcast with 100,000 monthly listeners of how people have used real-estate investing to accomplish their financial goals.

9. Morgan Stanley recommended a batch of stocks that can protect your portfolio from a coming market downturn. Margin expectations have fallen at the fastest rate since the financial crisis as earnings turn negative — but these 16 tech stocks look poised to rise anyway.

10. Nvidia has room to climb another 19%, according to Credit Suisse analysts. When it comes to artificial intelligence, no other tech firm comes close, the bank said. Shares of the top chip-maker have soared more than 60% year-to-date.

Curated by Phil Rosen in New York. Feedback or tips? Tweet @philrosenn or email prosen@insider.com.

Edited by Max Adams (@maxradams) in New York and Hallam Bullock (@hallam_bullock) in London.