Federal Reserve Chair Jerome Powell has indicated that the central bank may need to raise interest rates more than previously expected in response to strong economic data, stating that the "ultimate level of interest rates is likely to be higher than previously anticipated".
Powell stated that the Fed is ready to move in larger steps to control inflation if the "totality" of incoming data suggests more aggressive measures are necessary.
The remarks sparked a sharp repricing in bond markets, with money market futures pricing a more than 40% chance of a 50 basis point rate hike in March, up from 23% before the remarks.
Powell emphasized that no decision had been made yet and that a decision would be based on incoming data.
On Tuesday, as Powell testified before Congress, stock indexes fell with traders increasing bets of a 50 basis point rate hike in March after his comments.
Stocks fell again on Wednesday after Powell spoke on the same issues to another Congressional committee.
Powell outlined that the economy had been more resilient and inflation had been more long-lasting than anticipated.
He emphasized that any decision on interest rate hikes will be made based on the upcoming jobs and inflation data points to be released in the next week.
However, economists and traders interpreted Powell's comments in different ways.
Some saw them as a signal of a half-point interest rate hike at the Fed's March meeting, while others viewed his comments as mere cautionary statements.
As a result of the contrasting interpretations, stock prices tumbled and bond yields rose.
Futures contracts for the fed funds also pointed to differing probability estimates for interest hikes ranging from 48% to over 50%.