WASHINGTON — Federal Reserve Chairman Jerome Powell has opened the door to a larger half-point increase in interest rates this month and said officials will likely raise rates higher than expected. they had only planned it before to fight inflation in a stronger economy.
Mr. Powell’s comments on Tuesday, during the first two days of Capitol Hill hearings, offered his first public acknowledgment that data showing higher inflation and hiring could cause Fed officials to alter their recent strategy to rate increases in smaller quarter-point increments.
“The latest economic data is stronger than expected, suggesting that the ultimate level of interest rates is likely to be higher than expected,” Powell told the Senate Banking Committee. “If all the data were to indicate that faster tightening is warranted, we would be prepared to accelerate the pace of rate hikes.”
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Fed officials raised the benchmark federal funds rate by a quarter point to a range between 4.5% and 4.75% last month. This slowed the pace of rate hikes after increases of half a point larger in December and 0.75 points in November to allow them to better assess the effects of last year’s rapid increases.
In December, most of them thought they would raise the rate this year to between 5% and 5.5% and hold it until 2024. They will submit new projections at their March 21-22 meeting.
In making their next rate decision, Powell suggested officials would pay close attention to Friday’s government report on February hiring and next week’s inflation report. Since their last meeting on February 1, several economic reports showed that hiring, spending and inflation were stronger than expected in January, and data revisions showed that inflation and labor demand work had not decreased as much as initially announced at the end of last year.
“We’re seeing a reversal, really, of what we thought we were seeing to some degree,” Powell said. Last month, he stressed the importance of moving more slowly to ensure the Fed doesn’t raise rates too much. On Tuesday, he said, “nothing in the data suggests to me that we’ve tightened too much.”
Some of the recent rally could reflect unusually warm weather in January that can interfere with seasonal adjustments in economic data, he said. But the magnitude of the reversal, along with revisions to previous data, “suggest that inflationary pressures are higher than expected at the time of our previous (rate-setting) meeting,” Powell said.
The Fed has tried to rein in investment, spending and hiring by raising rates, which makes borrowing more expensive and can lower the price of assets such as stocks and real estate. The federal funds rate influences other borrowing costs across the economy.
Tuesday’s hearing marked Powell’s first appearance before Congress since last June, when the Fed raised the federal funds rate to a range between 1.5% and 1.75%.
Most lawmakers on both sides of the aisle either complimented Mr. Powell on how interest rates have been handled over the past year, or offered only mild criticism.
But Sen. Elizabeth Warren (D., Mass.) defied him over fears the Fed’s efforts to tame inflation could lead to significantly higher job losses than central bank officials estimated. probable. During a tense exchange, Ms Warren repeatedly pressed Mr Powell to address an estimated 2 million workers who could lose their jobs as the Fed tries to slow the economy.
After several questions, Mr. Powell replied: “Will workers be better off if we just quit our jobs and inflation stays at 5%-6%?”
Mr. Powell is scheduled to return to Capitol Hill on Wednesday for a second day of hearings before a House committee. This will be his last planned public remarks on interest rate policy, and one last chance to shape market expectations, before the next Fed meeting. The officials begin their period of silence before the meeting on Saturday.
Federal Reserve Chairman Jerome Powell said in early February that the central bank would raise interest rates by a quarter of a percentage point. Powell said more increases will likely be needed to keep inflation down. Photo: Kevin Dietsch/Getty Images
Several Fed officials have indicated in recent weeks that they may raise rates this year more than expected. Three regional federal bank presidents said they could have backed a bigger half-point increase last month or will do so at the next meeting.
Recent strong economic data has changed investors’ rate expectations. At the last Fed meeting, investors in the interest rate futures markets expected officials to raise the federal funds rate once again this year, to a high of 4.9%, and begin reduce it this fall. Prior to Tuesday’s hearing, investors expected the rate to rise to around 5.5% by the middle of the year and stay there until the end of 2023, according to CME Group.
These expectations increased again during the hearing. At the end of Mr. Powell’s testimony, investors expected the fed funds rate to rise between 5.5% and 5.75% this year, and the likelihood of a half-point hike this month. rose to around 63%, from 32% before the hearing.
Mr. Powell faced limits guiding the markets this week due to the hiring and inflation reports that will be released after his testimony and before the next Fed meeting.
Employers added 517,000 jobs in January, a figure that shocked economists who expected a slowdown in hiring, while the jobless rate fell to 3.4%, a 53-year low. Friday’s labor report could offer clues as to whether the gain was a blow or a sign of an accelerating economy.
The decline in inflation at the end of last year came to a halt in January. The 12-month inflation rate, excluding volatile food and energy items, was 4.7%, down from 4.6% in December, as measured by the Commerce Department’s Personal Consumption Expenditures Price Index.
Write to Nick Timiraos at Nick.Timiraos@wsj.com
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