Fed’s Powell opens door to higher and possibly faster rate hikes

WASHINGTON, March 7 (Reuters) – The Federal Reserve will need to raise interest rates more than expected in response to strong recent data and if the “totality” of incoming information shows that tougher measures are needed to control If so, he is ready to take big steps. Inflation, Fed Chair Jerome Powell told US lawmakers on Tuesday.

“The latest economic data came in stronger than expected, suggesting that the final level of interest rates is likely to be higher than previously estimated,” the head of the US central bank said in opening remarks at a hearing before the Senate Banking Committee.

While some of that unexpected economic strength could be due to warm weather and other seasonal effects, Powell said the Fed was aware that it could also be a sign that it needs to do more to reduce inflation. , perhaps planning to persist with return-percentage-point moves in rates even larger than in the quarter.

“If the totality of the data indicates that more rapid tightening is warranted, we stand ready to increase the pace of rate hikes,” Powell said.

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His first remarks after an unexpected jump in inflation in January and the US government reported an unusually large increase in payroll jobs for that month, sharply revaluation in bond markets as investors increased bets by more than 70%. Given that the Fed would approve half. -percentage-point rate hike at its upcoming March 21-22 meeting, and pick up the anticipated endpoint for rate hikes.

Michael Brown, a market analyst at TraderX in London, said Powell’s statement was “surprisingly aggressive”. Along with a 50-basis-point rate hike, Brown said a strong monthly jobs report on Friday would likely “call for a 6% terminal rate,” which is about a percentage point higher than Fed officials have expected. That was estimated by December.

The Fed’s benchmark overnight interest rate is currently in the range of 4.50%-4.75%.

Even before Powell could present his testimony, the hearing began with an acrimonious introduction. The committee’s Democratic chairman, US Senator Sherrod Brown, said the Fed’s rate hike ignored the main cause of inflation – higher corporate profits.

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

Senator Tim Scott, the highest-ranking Republican on the panel and a potential 2024 presidential candidate, countered that the Biden administration’s spending policies were more to blame.

With the next policy meeting two weeks away, the release of the Labor Department’s jobs report for February on March 10 and an inflation report next week will be key in shaping policymakers’ decision on whether they are slipping behind the inflation curve again. A more restrained policy was planned in their last meeting.

In any case, Powell’s remarks to members of the Senate committee mark a clear admission that a “deflationary process” about which he spoke repeatedly at a February 1 news conference may not be so smooth. Is.

Although “inflation” is coming down since its peak last year, Powell said, “the process of getting inflation back to 2% has a long way to go and is likely to be bumpy.”

Powell will testify again on Wednesday before the Financial Services Committee of the House of Representatives.

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Possible labor market softening

Powell’s testimony weighed in on an issue now at the center of Fed discussion as officials decide whether the recent data will prove to be a “blip,” as one of his aides suggested, or be seen as evidence that the central The bank needs to depend on the economy being tougher than currently expected.

In his testimony, Powell said much of the central bank’s monetary policy effect may still be in the pipeline, with the labor market still at a 3.4% unemployment rate not seen since 1969, and strong wage gains.

In a comment that may well be seized upon by some Senate Democrats, Powell suggested that the weakening labor market may have to account for inflation in the broader services sector, a labor-intensive part of the economy where prices are higher. The growth continues.

“To restore price stability, we will need to see lower inflation in the region, and some softening of labor market conditions,” Powell said.

Powell’s last monetary policy report to Congress was in June, in what turned out to be the Fed’s most aggressive cycle of rate hikes since the 1980s. That monetary tightening has pushed up the cost of borrowing for home mortgages, a topic of particular sensitivity for elected officials, contributed to volatility in traditional equity markets as well as alternative assets like cryptocurrencies, and raised questions about the Fed’s efficacy. There has been some extensive debate.

Inflation has fallen since Powell’s last appearance in Congress. After topping out at an annual rate of 9.1% in June, the consumer price index fell to 6.4% in January; The separate personal consumption expenditure price index, which the Fed uses as the basis for its 2% target, peaked at 7% in June and fell to 5.4% by January.

Reporting by Howard Schneider; Additional reporting by Saqib Ahmed, Editing by Dan Burns, Nick Ziminski and Paul Simao

Our Standards: The Thomson Reuters Trust Principles.

Howard Schneider

Thomson Reuters

Covers the US Federal Reserve, monetary policy and the economy, a graduate of the University of Maryland and Johns Hopkins University with previous experience as a foreign correspondent, economics reporter and on local staff for The Washington Post.

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