The United States Federal Reserve is likely to have to raise interest rates more than expected in response to recent strong data and is ready to take bigger steps if the “total” of incoming information suggests tougher measures are needed to contain inflation. hold, Fed Chairman Jerome Powell told US lawmakers on Tuesday.
“The latest economic data is stronger than expected, suggesting that the eventual interest rate level will likely be higher than previously expected,” the chief of the Federal Reserve said in his opening address at a hearing before the Senate Banking Committee.
While some of that unexpected economic strength may be due to warm weather and other seasonal effects, Powell said the Fed realized it could also be a sign it needs to do more to dampen inflation, perhaps even returning to normal. larger rate hikes than the quarter — percentage increments that officials planned to hold.
“If the totality of the data indicated that faster tightening is warranted, we would be willing to step up the pace of rate hikes,” Powell said.
Senators responded with a wide range of questions, criticizing whether the Fed correctly diagnosed the inflation problem and whether price pressures could be tamed without significant damage to economic growth and the labor market.
Democrats on the committee focused on the role high corporate profits can play in continued inflation, with Massachusetts Sen. Elizabeth Warren accusing the Fed of “gambling with people’s lives” through rate hikes that, according to the central bank’s most recent projections, would lead to the unemployment rate rising by more than a percentage point – a loss historically associated with economic recessions.
“You claim there is only one solution: lay off millions of workers,” Warren said.
“Raising interest rates certainly won’t stop business 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 policies limited supply and kept prices higher than necessary, and whether restrained federal spending could help the Fed’s cause.
“The only way to get this sticky inflation down is to deal with it on the monetary side and the fiscal side. The more we help on the tax side, the fewer people you’ll have to put out of work,” said Senator John Kennedy, a Republican from Louisiana.
“That’s how it could go,” said Powell, who at a separate point during the hearing agreed with Democratic lawmakers’ claims that lower corporate profits could help lower inflation and Republicans’ arguments that more energy production would can help lower prices.
“It is not for us to point the finger,” said the Fed chief.
‘Surprisingly hawkish’
Powell’s comments, his first since inflation unexpectedly spiked in January and the U.S. government reported an unusually large increase in payroll jobs for that month, sparked a rapid repricing in bond markets as investors ramped up bets on more than the 70 percent that the Fed would approve six months later. – percentage rate increase at the upcoming March 21-22 meeting, and lift the expected end point for rate increases. Equity markets fell and the US dollar traded higher.
Powell’s statement was “surprisingly hawkish,” said Michael Brown, a market analyst at TraderX in London. With a 50 basis point rate hike now in play, Brown said a strong monthly jobs report on Friday would likely lead to “calls for a 6 percent final rate,” nearly a percentage point higher than Fed officials predicted in December.
The Fed’s overnight interest rate is currently between 4.5 and 4.75 percent.
With the next policy meeting in two weeks, the release on March 10 of the U.S. Department of Labor’s February jobs report and an inflation report next week will be critical in determining policymakers’ judgment on whether to get behind the curve again. inflation curve are slipping, or may stick with the more dovish policies planned at their last meeting.
In any case, Powell’s comments to members of the Senate Judiciary Committee are a clear admission that a “disinflation process” he spoke of repeatedly at a Feb. 1 press conference may not be going so smoothly.
While inflation has been “moderate” since last year’s peak, Powell said, “the process of bringing inflation back to 2 percent has a long way to go and is likely to be bumpy.”
Powell will testify again on Wednesday before the House Financial Services Committee.
Possible easing of the labor market
Powell’s testimony weighed on an issue now central to the Fed discussion, as officials decide whether recent data will prove to be a “blip,” as one of his colleagues suggested, or seen as evidence that the central bank is watching the economy. must lean even more difficult than now expected.
In his testimony, Powell noted that much of the impact of central bank monetary policy may still be in the pipeline, with the labor market still at a 3.4 percent unemployment rate not seen since 1969, and strong wage increases.
In a comment that some Senate Democrats may be playing on, Powell suggested that the labor market would need to weaken for inflation to fall in the broad services sector, a labor-intensive part of the economy where prices continue to rise.
“To restore price stability, we will need lower inflation in this sector and the labor market will most likely ease somewhat,” said Powell.
Powell’s last monetary policy report to Congress was in June, at the beginning of what became the most aggressive cycle of Fed rate hikes since the 1980s. That monetary tightening has driven up borrowing costs for residential mortgages, a subject particularly sensitive to elected officials; contributed to volatility in traditional stock markets and alternative assets such as cryptocurrencies; and sparked some wider debates about the effectiveness of the Fed.
Inflation has fallen since Powell’s last appearance in Congress. After peaking at 9.1 percent year-on-year in June, the consumer price index fell to 6.4 percent in January; the separate personal consumer spending index, which the Fed uses as the basis for its 2 percent target, peaked at 7 percent in June and had fallen to 5.4 percent in January.