Federal Reserve Chairman Jerome Powell on Tuesday cautioned that rates of interest are more likely to head higher than central bank policymakers had expected.
Citing data earlier this 12 months showing that inflation has reversed the deceleration it showed in late 2022, the central bank leader warned of tighter monetary policy ahead to slow a growing economy.
“The most recent economic data have are available stronger than expected, which suggests that the final word level of rates of interest is more likely to be higher than previously anticipated,” Powell said in remarks prepared for 2 appearances this week on Capitol Hill. “If the totality of the information were to point that faster tightening is warranted, we can be prepared to extend the pace of rate hikes.”
Those remarks carry two implications: One, that the height, or terminal, level of the federal funds rate is more likely to be higher than the previous indication from the Fed officials, and, two, that the switch last month to a smaller quarter-percentage point increase may very well be short-lived if inflation data proceed to run hot.
Of their December estimate, officials pegged the terminal rate at 5.1%. Current market pricing moved higher following Powell’s remarks, to a spread of 5.5%-5.75%, in response to CME Group data. Powell didn’t specify how high he thinks rates ultimately will go.
The speech comes with markets generally optimistic that the central bank can tame inflation without running the economy right into a ditch. Stocks fell sharply while Treasury yields jumped after Powell’s remarks were released.
Federal Reserve Chair Jerome H. Powell testifies before a U.S. Senate Banking, Housing, and Urban Affairs Committee hearing on “The Semiannual Monetary Policy Report back to the Congress” on Capitol Hill in Washington, U.S., March 7, 2023.
Kevin Lamarque | Reuters
January data shows that inflation as gauged by personal consumption expenditures prices — the popular metric for policymakers — was still running at a 5.4% pace annually. That is well above the Fed’s 2% long-run goal and a shade above the December level.
Powell said the present trend shows that the Fed’s inflation-fighting job isn’t over, though he noted that a few of the hot January inflation data may very well be the product of unseasonably warm weather.
“We have now covered lots of ground, and the total effects of our tightening up to now are yet to be felt. Even so, we have now more work to do,” he said.
Powell speaks Tuesday to the Senate Banking, Housing and Urban Affairs Committee then will address the House Financial Services Committee on Wednesday.
The chairman faced some pushback from Democrats on the Senate panel who blamed inflation on corporate greed and price gouging and said the Fed should reconsider its rate hikes. Sen. Elizabeth Warren, (D-Mass.), a frequent Powell critic, charged that the Fed’s inflation goals will put two million people out of labor.
“We’re taking the one measures we have now to bring inflation down,” Powell said. “Will working people be higher off if we just walk away from our jobs if inflation stays at 5, 6%?”
The Fed has raised its benchmark fund rate eight times over the past 12 months to its current targeted level between 4.5%-4.75%. On its face, the funds rate sets what banks charge one another for overnight lending. But it surely feeds through to a mess of other consumer debt products corresponding to mortgages, auto loans and bank cards.
In recent days, some officials, corresponding to Atlanta Fed President Raphael Bostic, have indicated that they see the speed hikes coming to a detailed soon. Nevertheless, others, including Governor Christopher Waller, have expressed concern in regards to the recent inflation data and say tight policy is more likely to stay in place.
“Restoring price stability will likely require that we maintain a restrictive stance of monetary policy for a while,” Powell said. “The historical record cautions strongly against prematurely loosening policy. We’ll stay the course until the job is completed.”
Powell noted some progress on inflation for areas corresponding to housing.
Nevertheless, he also noted “there may be little sign of disinflation” in relation to the vital category of services spending excluding housing, food and energy. That’s a crucial qualifier considering that the chairman at his post-meeting news conference in early February said the disinflationary process had begun within the economy, remarks that helped send stocks higher.
Markets mostly had expected the Fed to enact a second consecutive quarter-point, or 25 basis points, rate increase on the Federal Open Market Committee meeting later this month. Nevertheless, as Powell spoke priced in a greater than 50% probability of a better half-point increase on the March 21-22 meeting, in response to CME Group data.
Powell reiterated that rate decisions might be made “meeting by meeting” and might be depending on data and their impact on inflation and economic activity, slightly than a preset course.