WASHINGTON, Mar 7 (Portal) – The Federal Reserve is likely to have to hike interest rates more than expected in response to recent strong data and is poised to move in larger steps if the “aggregate” of incoming information suggests tighter ones Measures are needed to control inflation, Fed Chair Jerome Powell told US lawmakers on Tuesday.
“Recent economic data is stronger than expected, suggesting that the final interest rate level will likely be higher than previously thought,” the Federal Reserve Chairman said in his opening remarks at a hearing before the Senate Banking Committee.
While some of this unexpected economic strength could be due to warm weather and other seasonal effects, Powell said the Fed is aware that it could also be a sign that it needs to do more to dampen inflation, and maybe even has to return to larger rate hikes than it did in the quarter — percentage point increments that officials wanted to hold on to.
“If the body of data suggested that faster tightening was warranted, we would be willing to increase the pace of rate hikes,” Powell said.
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The comments, his first since January’s unexpected surge in inflation and the US government’s announcement of an unusually large increase in payrolls for this month, prompted a quick repricing in bond markets as investors lowered their bets on over 70% raised that the Fed would approve a half-percentage-point rate hike at its upcoming March 21-22 meeting and raise the expected endpoint for rate hikes.
Powell’s testimony 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 6% final rate,” nearly a percentage point higher than Fed officials had forecast in December.
The Fed’s benchmark federal funds rate is currently in the 4.50% to 4.75% range.
Even before Powell delivered his testimony, the hearing got off to a sharp start. US Senator Sherrod Brown, the committee’s Democratic chair, said the Fed’s rate hikes ignored what he saw as the main cause of inflation — high corporate earnings.
“Rising interest rates is certainly not going to stop companies from taking advantage of all these crises to push prices up,” Brown said.
Senator Tim Scott, the senior Republican on the panel and a possible 2024 presidential nominee, countered that the Biden administration’s spending policies were more to blame.
[1/5] Federal Reserve Chairman Jerome H. Powell takes his seat to address a hearing of the US Senate Committee on Banking, Housing and Urban Development on the “Semi-Annual Monetary Policy Report to Congress” on Capitol Hill in Washington, United States to testify on March 7, 2023. Portal/ Kevin Lamarque
With the next policy meeting two weeks away, the release of the Labor Department’s February jobs report on March 10 and an inflation report next week will be crucial to shaping policymakers’ judgment on whether or not to slip back behind the inflation curve adhere to the more dovish policies envisaged at their last meeting.
In any case, Powell’s comments to Senate committee members represent a clear admission that a “disinflationary process,” which he repeatedly spoke of in a Feb. 1 news conference, may not be going so smoothly.
Although inflation “has moderated since its peak last year,” Powell said, “the process of bringing inflation back to 2% has a long way to go and will likely be bumpy.”
Powell will testify again before the House Financial Services Committee on Wednesday.
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Powell’s testimony weighed on an issue that is now at the center of the Fed’s discussion as officials decide whether the latest data will prove to be “outliers,” as one of his colleagues suggested, or be taken as evidence that the central bank is focusing on supporting the economy has to be even heavier than currently expected.
In his testimony, Powell noted that much of the impact of central bank monetary policy may still be in the pipeline as the job market still shows an unemployment rate of 3.4%, the highest since 1969, and strong wage increases.
In a comment that might well be echoed by some Senate Democrats, Powell suggested that the labor market may need to weaken in order for inflation to come down across the service sector, a labor-intensive part of the economy where prices continue to rise.
“In order to restore price stability, we need to see lower inflation in this sector and there will very likely be some softening of labor market conditions,” Powell said.
Powell’s last monetary policy report to Congress was in June, which marked the start of the most aggressive cycle of Fed rate hikes since the 1980s. This monetary tightening has pushed up home mortgage borrowing costs, an issue particularly sensitive to elected officials, contributed to volatility in traditional stock markets as well as alternative assets such as cryptocurrencies, and sparked some broader debates about the Fed’s effectiveness.
Inflation has come down since Powell’s last appearances in Congress. After peaking at an annual rate of 9.1% in June, the consumer price index fell to 6.4% in January; the separate personal consumption spending index, which the Fed uses as the basis for its 2% target, peaked at 7% in June and had fallen to 5.4% by January.
Reporting by Howard Schneider; Additional reporting by Saqib Ahmed Editing by Dan Burns, Nick Zieminski and Paul Simao
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Howard Schneider