Fed’s Jerome Powell says rates likely need to higher, faster

The Federal Reserve will likely need to raise interest rates more than expected in response to recent strong data and is prepared to move in larger steps if the “totality” of incoming information suggests tougher measures are needed to control inflation, Fed Chair Jerome Powell told lawmakers on Tuesday.

“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” Powell said in opening remarks at a hearing before the Senate Banking Committee.

The remarks were his first since inflation unexpectedly jumped in January and the government reported an unusually large increase in payroll jobs for that month.

Stocks fell after Powell’s comments, with the Dow sliding more than 200 points, or 0.7%.

While some of that unexpected economic strength may have been due to warm weather and other seasonal effects, Powell said the Fed was cognizant it may also be a sign the central bank needs to do more to temper inflation, perhaps even returning to larger rate increases than the quarter-percentage-point steps officials had been planning to stick with.

“If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,” Powell said.

The Fed will hold its next policy meeting on March 21-22, with the release this Friday of the government’s monthly jobs report and an inflation report next week now critical in policymakers’ judgment about whether they are again slipping behind the inflation curve, or can stick with the more tempered policy planned at their last meeting.

But in either case Powell’s comments mark a stark acknowledgement that a “disinflationary process” he spoke of repeatedly in a Feb. 1 news conference may not be so smooth.

Although inflation “has been moderating,” since its peak last year, Powell said, “the process of getting inflation back down to 2% has a long way to go and is likely to be bumpy.”

Even before Powell presented his testimony, the hearing began with a sharp prelude. U.S. Senator Sherrod Brown, the Democratic chair of the committee, said the Fed’s rate hikes ignored what he viewed as a chief cause of inflation – high corporate profits.

“Raising interest rates certainly won’t stop business from exploiting all these crises to jack up prices,” Brown said.

Senator Tim Scott, the highest ranking Republican on the panel and a possible 2024 presidential candidate, retorted that the Biden administration’s spending policies were more to blame.

Possible labor market softening

Powell’s testimony marked his first public remarks on an issue now at the center of Fed discussion as officials weigh whether recent data will proveto be a “blip,” as one of his colleagues suggested, or be seen as evidence the central bank needs to lean on the economy even harder than currently expected.

In his testimony, Powell noted that much of the impact of the central bank’s monetary policy may still be in the pipeline, with the labor market still sustaining a 3.4% unemployment rate not seen since 1969, and strong wage gains.

In a comment that may well be seized on by some Senate Democrats, Powell suggested that the labor market might have to weaken for inflation to fall across the broad services sector, a labor-intensive part of the economy where prices continue to rise.

“To restore price stability, we will need to see lower inflation in this sector, and there will very likely be some softening in labor market conditions,” Powell said.

Powell’s last monetary policy report to Congress was in June, which was early in what became the most aggressive cycle of Fed rate increases since the 1980s. That monetary tightening has driven up borrowing costs for home mortgages, a topic of particular sensitivity for elected officials, contributed to volatility in traditional equity markets as well as alternative assets like cryptocurrencies, and sparked some broader debates about the Fed’s efficacy.

Inflation has fallen since Powell’s last appearances in Congress. After topping out at an annual rate of 9.1% in June, the Consumer Price Index dropped to 6.4% in January; the separate Personal Consumption Expenditures price index, which the Fed uses as the basis for its 2% target, peaked at 7% in June and had fallen to 5.4% as of January.