Fed Chairman Powell says interest rates “could be higher” than previously forecast

On Tuesday, Federal Reserve Chairman Jerome Powell warned that interest rates may be higher than central bank policymakers expect.

Citing data earlier this year that showed inflation had recovered from the slowdown seen at the end of 2022, the central bank chief warned of tighter monetary policy ahead to slow the growing economy.

“Recent economic data has been stronger than expected, suggesting that the final level of interest rates may be higher than previously expected,” Powell said in remarks prepared for two meetings on Capitol Hill this week. “We would be prepared to increase the pace of rate hikes if the data set suggests that more rapid tightening is warranted.”

These warnings have two implications: first, that the peak or terminal level of the federal funds rate may be higher than previous guidance from Fed officials, and second, that it moved to less than a quarter of a percentage point last month. If the inflation data is hot, the score increase could be short-lived.

Officials set the terminal rate at 5.1% based on December prices. According to data from CME Group, the current market price rose to a range of 5.5%-5.75% after Powell’s remarks. Powell did not specify how high rates would go.

The report comes with markets optimistic that the central bank will be able to tackle inflation without driving the economy into a hole. Stocks fell sharply after Powell’s remarks as Treasury yields rose.

Federal Reserve Chairman Jerome H. Powell testifies before a U.S. Senate Banking, Housing and Urban Affairs Committee hearing on the Semiannual Monetary Policy Report to Congress on Capitol Hill in Washington, U.S., March 7, 2023.

Kevin Lamarck | Reuters

The January data, a favorable indicator for policymakers, shows that inflation, as measured by the price of personal consumption expenditures, is still running at an annual rate of 5.4%. That’s well above the Fed’s long-term target of 2% and a shade past December’s level.

Powell said the current trend suggests the Fed’s job of fighting inflation is far from over, though he noted that the hot January inflation data may have been a product of some unseasonably warm weather.

“We’ve come a long way, so far the full impact of our tightening has yet to be felt. Even so, we still have a lot of work to do,” he said, adding that the road there could be “bumpy”.

Powell will appear before the Senate Banking, Housing and Urban Affairs Committee on Tuesday and then the House Financial Services Committee on Wednesday.

The chairman faced some backlash from Democrats on a Senate panel who blamed inflation on corporate greed and price gouging and said the Fed should reconsider its rate hikes. Senator Elizabeth Warren, a frequent critic of Powell, charged that the Fed’s inflation targets would leave 2 million people out of work.

“We are taking the only measures to reduce inflation,” Powell said. “If inflation stays at 5.6%, will working people be better off if we quit?”

The Fed has raised its benchmark funds rate eight times in the past year to its current target range of 4.5%-4.75%. By itself, the funds rate dictates what banks charge each other for overnight loans. But it also provides many other consumer debt products, such as mortgages, auto loans and credit cards.

In recent days, some officials, such as Atlanta Fed President Rafael Bostic, have indicated that rate hikes will end soon. However, others, including Gov. Christopher Waller, expressed concern over the latest inflation data and said tighter policy was likely to remain in place.

“Restoring price stability may require us to maintain an accommodative monetary policy stance for some time,” Powell said. “The historical record strongly warns against premature release of policy. We will follow the course until the work is completed.”

Powell noted some progress on inflation in areas such as housing.

However, he noted “little sign of inflation” when it comes to key services categories excluding housing, food and energy. This is an important criterion, given the chairman’s post-meeting press conference in early February that the economy was inflationary and helped boost stocks.

Markets had largely expected the Fed to adopt a second consecutive quarterly, or 25 basis point, rate hike at its Federal Open Market Committee meeting later this month. However, Powell said, according to data from the CME Group, markets are priced at more than a 50% chance of a half-point gain at the March 21-22 meeting.

Powell reiterated that rate decisions will be made “through the meeting” and will depend on the data and their impact on inflation and economic activity, not on a predetermined course.

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