Jay Powell warned that the US Federal Reserve was ready to return to bigger interest rate hikes to fight inflation during an appearance before Congress on Tuesday.
In his first public intervention since data release showed the central bank was struggling to calm the US economy despite a year-long monetary tightening campaign, the Fed Chairman signaled his willingness to raise interest rates. interest in combating the persistent rise in prices.
Powell told the Senate Banking Committee that “the ultimate level of interest rates will likely be higher than expected” and said recent economic data was “stronger than expected.”
He added: “If the full data were to indicate that faster tightening is warranted, we would be prepared to accelerate the pace of rate hikes.”
The Fed Chairman’s remarks prompted a stock market sell-off, with the S&P 500 falling nearly 1% in late morning New York while the Nasdaq fell 0.84%. The two-year Treasury yield, which moves with market expectations, hit its highest level since 2007. The dollar rose 1% against the euro on the day to $1.0572.
Traders upped their bets on a half-point rate hike at the March 21-22 Fed meeting, with odds now favoring such a hike over a quarter-point hike, according to the CME Group.
The central bank reduced the size of its rate hikes from 0.75 percentage points between June and November to a half-point hike in December. It fell again in February to a more traditional increase of a quarter point.
The Fed’s main interest rate is now in a target range between 4.5% and 4.75%, compared to near zero at the same time last year. In December, Fed officials expected interest rates to peak at 5.1% this year.
But Powell’s comments indicate he is ready to tighten the economy further to bring down inflation.
His hawkish rhetoric is in line with statements by Christine Lagarde, President of the European Central Bank, who warned this weekend that price pressures were “sticky”, requiring new measures to tackle the “monster” of the inflation. Financial markets now expect the European rate to rise from 2.5% to over 4%.
On the other hand, Andrew Bailey, Governor of the Bank of England, refrained from giving a precise orientation on British interest rates.
Two critical data releases due ahead of the Fed’s meeting this month will help inform its next rate decision: Friday’s monthly jobs report and the Consumer Price Index report for February, released next week.
Investors and economists will be watching whether the rebound in the labor market and consumer demand in January has held up over the past month. Powell said the warm data “likely reflects the unusually warm weather” but also indicates “inflationary pressures are higher than expected.”
Democrats are increasingly worried that the Fed is going too far in tightening monetary policy, triggering a recession that could undermine many of the labor market gains made in the recovery from the coronavirus pandemic. But Powell argued that bringing core inflation back to the Fed’s 2% target from January’s 4.7% level would “most likely” require “some easing of labor market conditions,” suggesting future job losses.
“We cannot risk undermining any of the successes of our current economy,” said Sherrod Brown, chairman of the Senate Banking Committee.
Elizabeth Warren, the progressive Democrat from Massachusetts, accused Powell of “gambling with people’s lives.”
Asked by Warren if Americans at risk of losing their jobs are just supposed to “put up with it,” Powell replied, “Will workers be better off if we just quit our jobs and inflation stays above 6%?
He added that the “social cost of failure” on inflation was “very, very high” and warned of the risk of the “psychology” of “self-perpetuating” inflation.
In a separate exchange with John Kennedy, the Republican senator from Tennessee, Powell dismissed the idea that falling inflation would push the unemployment rate above 10%.
Instead, he said the Fed sees a “pathway” to bring inflation under control “with smaller effects on the labor market.”
Powell has also faced questions about banking regulation, with Democrats urging the Fed to tighten capital standards for the biggest institutions and Republicans arguing for softer treatment. Michael Barr, the Fed’s vice chairman for supervision, is leading a review of capital rules.
Additional reporting by Tommy Stubbington and Chris Giles