Fed’s Powell sets the stage for higher and possibly faster rate hikes

WASHINGTON, March 7 (Reuters) – The Federal Reserve is likely to 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 that more action is needed. Strict 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 U.S. central bank chief said in his semiannual testimony before the Senate Banking Committee. .

While some of this unexpected economic strength may be due to warm weather and other seasonal effects, Powell said it could also be a sign that the Fed needs to do more to temper inflation, perhaps even returning to rate increases larger than quarter percent. one-time steps that officials intended to use in the future.

“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 were Powell’s first since inflation surged unexpectedly in January, and marked a stark acknowledgment that the “disinflationary process” he spoke of repeatedly at a February 1 press conference will not was not going smoothly.

The senators responded with a wide range of questions and criticized whether the Fed was correctly diagnosing the inflation problem and whether price pressures could be contained without significantly harming economic growth and the labor market.

Committee Democrats have focused on the role high corporate profits could play in lingering inflation, with Sen. Elizabeth Warren of Massachusetts accusing the Fed of “gambling with people’s lives” through rate hikes that it says the central bank’s most recent projections would cause the unemployment rate to rise by more than one percentage point – a loss associated with economic recessions in the past.

“You claim there’s only one solution: lay off millions of workers,” Warren said.

“Will workers be better off if we just quit our jobs and inflation rebounds?” Powell retorted.

“Rising interest rates certainly won’t stop companies from exploiting all these crises to drive up prices,” said Sen. Sherrod Brown, an Ohio Democrat who chairs the committee.

Republicans focused on whether energy policy was restricting supply and keeping prices higher than needed, and whether restricting federal spending could help the Fed’s cause.

“The only way to bring down this persistent inflation is to attack it from the monetary side and from the fiscal side. The more we help fiscally, the fewer people you’ll have to lay off,” said Sen. John Kennedy, a Republican from Louisiana. .

“It could work that way,” said Powell, who at another point in the hearing agreed with claims by Democratic lawmakers that lower corporate profits could help reduce inflation, and with Republicans’ arguments that increased energy production could help lower prices.

“It’s not for us to point fingers,” the Fed chief said.

“AMAZING HAWKISH”

Powell’s remarks, virtually assuring that Fed officials will project a higher end point for the central bank’s benchmark overnight interest rate at the next meeting on March 21-22, sparked a reassessment fast in bond markets as investors raised bets that the Fed would approve a half-percentage-point rate hike when they meet in two weeks.

The Fed’s key rate is currently between 4.50% and 4.75%. In December, officials saw that rate peak at around 5.1%, a level that investors expect to see rise by at least half a percentage point now.

Stock markets added to initial losses and ended the day sharply lower, with the S&P 500 Index (.SPX) falling more than 1.5%. The US dollar also rose and yields on 2-year Treasury bills exceeded 5%, the highest since 2007.

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 March 10 release of the Labor Department’s jobs report for February and an inflation report next week were cited by Powell as important in shaping what the Fed will do at its next meeting.

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

‘LONG WAY TO GO’

Powell’s hearing and testimony delved into an issue that is now at the center of Fed discussions as officials try to determine whether recent data will prove to be a “weak point” or ultimately signal that the inflation remains stickier than expected and warrants a tougher response from the Fed.

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.

While Powell said he believed the Fed’s 2% inflation target could still be met without dealing a major blow to the U.S. labor market, he acknowledged on Tuesday that “there will most likely be a some easing of labor market conditions”.

How much remains uncertain, but Powell said the focus will remain more directly on the behavior of inflation.

Inflation has fallen since Powell’s last appearances before 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.

But that’s still too high, Powell said.

“The process of getting inflation back to 2% has a long way to go and will likely be bumpy,” Powell said, adding later in the hearing that “the social costs of failure are very, very high.”

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

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