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Wednesday's Interest Rate Watch and What Powell Just Warned

Ahead of the all-important inflation report released this morning, Jerome Powell pre-empted the market’s expectations for interest rates. Powell repeated yesterday that the central bank should stay patient. It will leave interest rates higher for longer. That way, monetary policy has a chance to work its way through the economy.

Markets detached their expectations from the Fed’s monetary policy. The U.S. government is spending aggressively on infrastructure, clean energy, student loan debt forgiveness, and military equipment. That spending activity is inflationary. Still, the money flow increases the value of various parts of the economy.

Banks benefit from the (mostly) debt-free student graduate. Banks like JP Morgan (JPM) closed at $201.51, an all-time high. Wells Fargo (WFC) and Citi (C) are also at 52-week highs.

Job Growth Slowed

Powell said that the restrictive policy weighed on the labor market. However, April's job growth slowed because the government added fewer workers.

Markets are complacent about the Fed’s benchmark lending rate at 5.25% to 5.50%. Additionally, the U.S. Treasury bill yields are in the mid 4% to low 5% range. The debt market still anticipates interest rate cuts sooner.

Your Takeaway

Borrowing costs will remain high. This puts pressure on the automotive leasing market but has not yet hurt home prices. With stocks like Lennar (LEN) up and Zillow (Z) rebounding, few expect demand for homes to slow anytime soon.