Federal Reserve Jerome Powell says the Fed may need to speed up rate hikes

Fed Chairman Jerome Powell said in prepared testimony Tuesday that the Federal Reserve may need to step up its rate hikes and raise borrowing costs to higher levels than previously expected if evidence continues to point to a robust economy and continued high inflation. Senate panel.

“The latest economic data is stronger than expected, suggesting that the eventual interest rate level will likely be higher than previously expected,” Powell said in testimony before the Senate Banking Committee.

Powell’s comments raise the possibility that the Fed will raise its key interest rate by half a percentage point at its next March 21-22 meeting, after making a quarter-point hike in early February. In the past year, the central bank has raised its policy rate – which affects many consumer and business loans – eight times.

“This statement opens the door to a return to a 50 basis point increase at the March meeting and possibly beyond if the data stream confirms the renewed acceleration in both the labor market and inflation, both of which positively surprised in January,” Morgan analysts noted. Stanley up. in a research note on Tuesday.

The prospect of larger-than-expected rate hikes sent US markets plummeting on Tuesday, with the Dow falling 0.9% to 33,120 and the S&P 500 losing 1% in late morning trading.

Still, the central bank will have several additional data on inflation and the state of the economy to process ahead of its next meeting, LPL Financial chief economist Jeffrey Roach noted in a research note Tuesday. For example, February’s jobs report will be released on Friday, while last month’s inflation data will be released on March 14.

“[S]With inflation looking slightly softer in February than the previous month, the market may be overreacting at this point,” Roach noted. inflation.”

The Fed is “ready” to increase the rate of hikes

Most economists and Wall Street investors had expected the Fed to raise another quarter of a point in upcoming meetings. But over the past few days, traders have been pricing in a higher chance of a half-point rise, according to futures markets.

The Fed previously raised its benchmark interest rate by half a point in December, imposing four three-quarter point increases.

“If the totality of the data indicated that faster tightening is warranted, we would be willing to step up the pace of rate hikes,” Powell said.

In his remarks on Tuesday, Powell hit back at some of the optimistic comments about falling inflation he had made after the Fed’s Feb. 1 meeting, noting that “the disinflation process has begun” and referring to “disinflation” — a broad and steady slowdown in inflation – several times. At that point, annual consumer price growth had slowed for six consecutive months.

But after that meeting, the latest reading of the Fed’s desired inflation measure showed consumer prices rose the most in seven months from December to January. And reports on hiring, consumer spending and the broader economy have also indicated that growth remains healthy.

Such economic data, Powell said Tuesday, “partially reversed the mitigating trends we saw in the data a month ago.”

Bumpy path ahead

The Fed chairman acknowledged that inflation “has been moderating in recent months,” but added that “the process of bringing inflation back to 2% has a long way to go and is likely to be bumpy.”

Several Fed officials said last week they would prefer to raise the Fed’s key rate above the 5.1% level they predicted in December if growth and inflation remain high. When the Fed raises its policy rate, mortgages, car loans, credit card rates and business loans tend to become more expensive. It’s a trend that could slow spending and inflation, but also risks putting the economy into recession.

Inflation, measured year on year, has slowed from its June peak of 9.1% to 6.4%. But progress stopped in January.

Powell has noted that so far most of the slowdown in inflation has reflected an unraveling of supply chains that has allowed more furniture, clothing, semiconductors and other physical goods to reach US shores. In contrast, inflationary pressures remain entrenched in many areas of the economy’s vast services sector.

For example, rent and housing costs remain an important driver of inflation. At the same time, the rents of a new apartment are rising much slowera trend that should ease housing inflation by the middle of the year, Powell said.

But the prices of many services — from dining out to hotel rooms to haircuts — are still rising rapidly, and there’s little sign of the Fed’s rate hikes having an effect. Fed officials say the cost of those services primarily reflects rising wages and salaries, which companies often pass on to their customers in the form of higher prices.

As a result, the Fed’s monetary policy report to Congress, which it publishes along with the chairman’s testimony, said that suppressing inflation will likely require “softer labor market conditions” — a euphemism for fewer vacancies and more layoffs.

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