Fed’s Jerome Powell says interest rates should probably be raised more than expected

The Federal Reserve is likely to need to raise interest rates more than expected in response to recent strong data and is ready to move in bigger steps if the ‘bulk’ of incoming information suggests tighter measures are needed to control inflation, Fed chairman told lawmakers Jerome Powell. on Tuesday.

“Recent economic data came out stronger than expected, suggesting that the final level of interest rates is likely to be higher than previously expected,” Powell said in his opening remarks at the Senate Banking Committee hearing.

The remark was his first since inflation suddenly spiked in January and the government reported an unusually large increase in jobs this month.

Shares fell after Powell’s comments, with the Dow down more than 200 points, or 0.7%.

While some of this unexpected economic strength may have been due to warmer weather and other seasonal effects, Powell said the Fed is aware that it could also be a sign that the central bank needs to do more to contain inflation, perhaps even returning to a bigger hike. rates than officials had planned to stick to steps of a quarter of a percentage point.

“If the backbone of the data indicated the need for faster tightening, we would be ready to step up the pace of rate hikes,” Powell said.

The Federal Reserve will hold its next policy meeting on March 21-22, with the government’s monthly jobs report and next week’s inflation report coming out this Friday, which are now critical to policymakers’ judgment of whether they’re falling behind again. inflation curve or may stick to the more moderate policies outlined at their last meeting.

But in any case, Powell’s comments signify a strong admission that the “disinflationary process” he repeatedly spoke about at the Feb. 1 press conference may not be as smooth.

While inflation is “decreasing” from its peak last year, Powell said, “the process of bringing inflation down to 2% has a long way to go and is likely to be bumpy.”

Even before Powell had delivered his testimony, the hearing began with an abrupt prelude. US Senator Sherrod Brown, the committee’s Democratic chairman, said the Fed’s rate hike ignores what he sees as the main cause of inflation – high corporate profits.

“Raising interest rates certainly won’t stop businesses from using all of these crises to drive up prices,” Brown said.

Sen. Tim Scott, the highest-ranking Republican in the group and a possible presidential candidate in 2024, countered that the Biden administration’s spending policy was more to blame.

Possible softening of the labor market

Powell’s testimony was his first public remarks on an issue now at the center of the Fed’s deliberations as officials weigh whether the latest data will turn out to be a “flash” as one of his colleagues suggested, or be seen as evidence a central bank should rely on. . the economy is even more difficult than currently expected.

In his speech, Powell noted that much of the impact of central bank monetary policy may still be under development as the labor market still maintains a 3.4% unemployment rate not seen since 1969 and significant wage growth. fees.

In a comment that may well be taken up by some Senate Democrats, Powell suggested that the labor market may need to ease for inflation to fall in the broad service sector, a labor-intensive part of the economy where prices continue to rise.

“In order to restore price stability, we will need to see lower inflation in this sector, and there will most likely be some easing in labor market conditions,” Powell said.

Powell’s last report on monetary policy to Congress was presented in June, marking the start of the Fed’s most aggressive rate hike cycle since the 1980s. This tightening of monetary policy has increased the cost of borrowing for home mortgages, a particularly sensitive topic for elected officials, contributed to volatility in traditional stock markets as well as alternative assets such as cryptocurrencies, and sparked a broader debate about efficiency. Fed.

Inflation has fallen since Powell’s last speech in Congress. After reaching an annualized mark of 9.1% in June, the consumer price index fell to 6.4% in January; a separate price index for personal consumption expenditure, which the Fed uses as the basis for its 2% target, peaked at 7% in June and fell to 5.4% in January.