© Reuters. FILE PHOTO: U.S. Federal Reserve Chairman Jerome Powell responds to a question from David Rubenstein (not pictured) during an onstage discussion at a meeting of the Economic Club of Washington, at the hotel Renaissance in Washington, DC, United States, on February 7
By Howard Schneider and Lindsay (NYSE:) Dunsmuir
WASHINGTON (Reuters) – The Federal Reserve will likely have to raise interest rates more than expected in response to recent strong data and is ready to act in larger steps if the “totality” of incoming information suggests tougher measures are needed. to control inflation, Fed Chairman Jerome Powell told US lawmakers on Tuesday.
“The latest economic data is stronger than expected, suggesting that the ultimate level of interest rates is likely to be higher than expected,” the head of the U.S. central bank said in his opening remarks at a conference. hearing before the Senate Banking Committee.
While some of this unexpected economic strength may be due to warm weather and other seasonal effects, Powell said the Fed is aware it could also be a sign it needs to do more to temper inflation. , maybe even back to larger rate increases than the quarter. -the milestones in percentage points that the managers had planned to respect.
“If all the data were to indicate that faster tightening is warranted, we would be prepared to accelerate the pace of rate hikes,” Powell said.
The comments, his first since inflation jumped unexpectedly in January and the US government signaled an unusually large increase in wage employment for that month, sparked a rapid revaluation in bond markets as investors raised bets to more than 70% that the Fed would approve a half-percentage-point rate hike at its next meeting on March 21-22, and raise the expected end point for rate increases.
Powell’s statement was “surprisingly hawkish”, said Michael Brown, market analyst at TraderX in London. With a 50 basis point rate hike currently in play, Brown said a strong monthly jobs report on Friday would likely lead to “6% terminal rate calls,” nearly a full percentage point. higher than Fed officials had expected in December.
The Fed’s benchmark overnight interest rate is currently between 4.50% and 4.75%.
Even before Powell presented his testimony, the hearing began with a sharp prelude. U.S. Senator Sherrod Brown, Democratic chairman of the committee, said the Fed’s rate hikes ignored what he saw as the main cause of inflation – high corporate profits.
“Rising interest rates certainly won’t stop companies from exploiting all these crises to drive up prices,” Brown said.
Senator Tim Scott, the top-ranked Republican on the panel and a possible 2024 presidential candidate, countered that the Biden administration’s spending policies were more to blame.
With two weeks to go before the next policy meeting, the March 10 release of the Labor Department’s February jobs report and an inflation report next week will be key in shaping policymakers’ judgment on whether they slip behind the inflation curve again or if they can stick to the more moderate policy forecast at their last meeting.
Either way, Powell’s comments to Senate committee members mark a stark acknowledgment that a “disinflationary process” he spoke of repeatedly at a Feb. 1 press conference may not be as fluid.
Although inflation “has moderated” 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 House Financial Services Committee.
Chart: Inflation reports were ‘surprised’ on the upside in February – https://www.Reuters.com/graphics/USA-ECONOMY/INFLATION-SURPRISE/zgvobnlkypd/chart.png
POSSIBLE SOFTENING OF THE LABOR MARKET
Powell’s testimony weighed in on an issue currently at the center of Fed discussions as officials decide whether recent data will turn out to be a “blip”, as one of his colleagues suggested, or be considered as evidence that the central bank needs to rely on the even tougher economy than currently expected.
In his testimony, Powell noted that much of the impact of central bank monetary policy could still be in play, with the labor market still maintaining a 3.4% unemployment rate not seen since 1969 and strong wage increases.
In a comment that may well be seized upon by some Senate Democrats, Powell suggested that the labor market may have to weaken for inflation to come down across the services sector, a high-powered part of the economy. labor intensive where prices continue to rise.
“To restore price stability, we will need lower inflation in this sector, and there will most likely be an easing in labor market conditions,” Powell said.
Powell’s last monetary policy report to Congress dates back to June, at the start of what has become the Fed’s most aggressive rate hike cycle since the 1980s. Home loans, a particularly sensitive topic for elected officials, have contributed to volatility in traditional stock markets as well as alternative assets like cryptocurrencies, and sparked broader debates about the Fed’s effectiveness.
Inflation has fallen 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 expenditure price index, which the Fed uses as the basis for its 2% target, peaked at 7% in June and had fallen to 5.4% in January.