Jay Powell warns Fed is ready to return to big interest rate hikes

Jay Powell warned that the US Federal Reserve is set to return to larger interest rate hikes to fight inflation in an appearance in Congress on Tuesday.

In its first public intervention since the data release showed the central bank struggling to cool the US economy despite a year-long campaign of monetary tightening, the Fed chair called for rate hikes to counter persistent price increases. indicated his desire to

Powell told the Senate Banking Committee that “the final level of interest rates is likely to be higher than previously estimated” and that recent economic data were “stronger than expected”.

He added: “If the totality of the data indicates there is a need for a faster tightening, we will be prepared to increase the pace of the rate hike.”

The Fed chair’s remarks prompted a selloff in the stock market, with the S&P 500 down nearly 1 percent in late-morning trading in New York, while the Nasdaq fell 0.84 percent. The two-year Treasury yield, which moves in line with market expectations, rose to its highest level since 2007. The dollar rose 1 percent against the euro to $1.0572.

Traders raised their bets on a half-point rate hike at the Fed’s March 21-22 meeting, according to CME Group, now favoring such an increase rather than a quarter-point increase.

The central bank has reduced the size of its rate hike from 0.75 percentage point between June and November to a half-point increase in December. It shifted again in February to a more traditional quarter-point increase.

The Fed’s key interest rate is now at a target range between 4.5 percent and 4.75 percent, compared to near zero at this time last year. In December, Fed officials projected that interest rates would hit an all-time high of 5.1 percent this year.

But Powell’s comments indicate he is willing to squeeze the economy further to push down inflation.

His inflammatory rhetoric is in line with statements from European Central Bank President Christine Lagarde, who warned over the weekend that price pressures were “sticky”, with more action needed to tackle the inflationary “monster”. Financial markets now expect European rates to rise from 2.5 percent to above 4 percent.

In contrast, Andrew Bailey, governor of the Bank of England, has been careful not to give precise guidance on UK interest rates.

Two key data to be released ahead of the Fed’s meeting this month will help inform its next decision on rates: the monthly jobs report on Friday and the Consumer Price Index report for February published next week.

Investors and economists will be watching to see whether the return to the labor market and consumer demand in January sustains from last month. Powell said the warm data “reflects potentially warmer weather” but also indicates that “inflationary pressures are ongoing more than expected”.

Democrats are growing increasingly concerned that the Fed will go too far in tightening monetary policy, triggering a recession that could undo many of the labor market gains made during the recovery from the coronavirus pandemic. But Powell said getting core inflation to the Fed’s 2 percent target from January’s level of 4.7 percent would “very likely” require “some softening of labor market conditions”, suggesting further job losses. Happened.

“We cannot afford to undermine one of the successes of our current economy,” said Sherrod Brown, chairman of the Senate Banking Committee.

Elizabeth Warren, a progressive Democrat from Massachusetts, accused Powell of “gambling with people’s lives”.

Asked by Warren whether Americans should “tolerate” the risk of losing their jobs, Powell replied: “Would working people be better off if we walked away from our jobs, and inflation remained above 6 percent?” ?”

He added the “social cost of failure” on inflation was “very, very high” and warned of the risk of “psychology” of “self-perpetuating” inflation.

In a separate exchange with Republican Senator John Kennedy of Tennessee, Powell rejected the idea that rolling back inflation would cause the unemployment rate to rise above 10 percent.

Instead, he said the Fed saw a “way” to get inflation under control “with less significant effects on the labor market.”

Powell also faced questions over banking regulation, with Democrats pressing the Fed to tighten capital standards for the largest institutions, and Republicans pleading for looser treatment. Michael Barr, the Fed’s vice chairman for supervision, is leading the review of capital rules.

Additional reporting by Tommy Stubbington and Chris Giles

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