Fed’s Powell sets the table for higher and possibly faster interest rate hikes
WASHINGTON, March 7 (Reuters) – The Federal Reserve is likely to need to raise interest rates more than expected in response to recent strong data and is prepared to take bigger steps if the “totality” of incoming information suggests tougher action is needed measures to control inflation, Federal Reserve Chairman Jerome Powell told US lawmakers on Tuesday.
“The latest economic data has come in stronger than expected, suggesting that the final level of interest rates is likely to be higher than previously expected,” the US central bank governor said in his biannual testimony before the Senate Banking Committee.
While some of the unexpected economic strength may have been due to warm weather and other seasonal effects, Powell said it could also be a sign that the Fed needs to do more to curb inflation, perhaps even returning to larger rate hikes than the quarterly percentage-point step officials intended to use going forward.
“Should the totality of the data indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,” Powell said.
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The comments were Powell’s first since inflation unexpectedly rose in January, and marked a stark acknowledgment that the “disinflationary process” he spoke of repeatedly at a Feb. 1 news conference was not unfolding smoothly.
Senators responded with a broad set of questions, pointing criticism at whether the Fed correctly diagnosed the inflation problem and whether price pressures could be tamed without significant damage to economic growth and the labor market.
Democrats on the committee focused on the role that high corporate profits could play in persistent inflation, with Sen. Elizabeth Warren of Massachusetts charging that the Fed was “gambling with people’s lives” through interest rate hikes that the central bank’s latest forecast would lead to. that unemployment increases by more than one percentage point – a loss linked to previous economic downturns.
“You claim there is only one solution: Lay off millions of workers,” Warren said.
“Will working people be better off if we just walk away from our jobs and inflation picks up?” Powell replied.
“Raising interest rates is certainly not going to stop businesses from taking advantage of all these crises to raise prices,” said Sen. Sherrod Brown, an Ohio Democrat who chairs the committee.
Republicans focused on whether energy policy was limiting supply and keeping prices higher than necessary, and whether limited federal spending could help the Fed’s cause.
“The only way to bring down this sticky inflation is to attack it on the monetary side and the fiscal side. The more we help on the fiscal side, the fewer people you will have to put out of work,” said Senator John Kennedy. a Republican from Louisiana.
– It could go like this, said Powell, who at a separate point in the hearing agreed with Democratic lawmakers’ claims that lower corporate profits could help lower inflation, and with Republicans’ arguments that more energy production could help lower prices.
“It’s not for us to point fingers,” the Fed chief said.
Powell’s remarks, which virtually assured that Fed officials will estimate a higher end point for the central bank’s overnight benchmark rate at the upcoming meeting on 21-22. March, triggered a rapid repricing in bond markets as investors increased their bets that the Fed would approve a half-percentage cut. -point interest rate increase when they meet in two weeks.
The Fed’s key interest rate is currently in the 4.50%-4.75% range. As of December, officials saw the rate rise to a peak of around 5.1%, a level investors expect could move at least half a percentage point higher now.
Stock markets pared early losses to end the day sharply lower, with the S&P 500 (.SPX) index down more than 1.5%. The US dollar also rose and the yield on the 2-year Treasury climbed above 5% – the highest since 2007.
Powell’s statement was “surprisingly hawkish,” said Michael Brown, a market analyst at TraderX in London. With a 50 basis point rate hike now in play, Brown said a strong monthly jobs report on Friday would likely lead to “calls for a terminal rate of 6%,” nearly a percentage point higher than Fed officials had projected in December.
The March 10 release of the Labor Department’s February jobs report and an inflation report next week were cited by Powell as important in shaping what the Fed does at its next meeting.
Powell will testify again Wednesday before the U.S. House of Representatives on financial services.
‘LONG WAY TO GO’
The hearing and Powell’s testimony touched on an issue that is now at the center of the Fed’s discussions as officials try to decide whether recent data will turn out to be a “blip,” or end up signaling that inflation remains stickier than expected and warrant a tougher response from the Fed.
In his testimony, Powell noted that much of the impact of the central bank’s monetary policy may still be in the pipeline, with the labor market still maintaining a 3.4% unemployment rate not seen since 1969 and strong wage growth.
While Powell said he believed the Fed’s 2% inflation target could still be reached without dealing a major blow to the US labor market, he acknowledged on Tuesday that “there will very likely be some softening in labor market conditions.”
How much remains unclear, but Powell said the focus will remain more directly on how inflation behaves.
Inflation has fallen since Powell’s last appearance before Congress. After peaking at an annual rate of 9.1% in June, the CPI fell to 6.4% in January; the separate personal consumption expenditures price index, which the Fed uses as the basis for its 2% target, peaked at 7% in June and had fallen to 5.4% in January.
But it’s still too high, Powell said.
“The process of getting inflation back to 2% has a long way to go and is likely to be bumpy,” Powell said, adding later in the hearing that “the social costs of failure are very, very high.”
Reporting by Howard Schneider; Additional reporting by Saqib Ahmed Editing by Dan Burns, Nick Zieminski and Paul Simao
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