Federal Reserve Jerome Powell says the Fed may need to accelerate rate hikes

Federal Reserve Chairman Jerome Powell on Tuesday US Federal Reserve Chairman Jerome Powell said on Tuesday the US Federal Reserve may need to increase interest rate hikes and increase borrowing costs to higher levels than previously expected if there is evidence of a stable economy and persistently high inflation. he said maybe. Senate panel.

“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 testimony to the Senate Banking Committee.

Powell’s comments raise the possibility that the Fed will raise the key interest rate by half a percentage point at its next meeting on March 21-22, after raising it by a quarter point in early February. In the past year, the central bank has raised its key rate – which affects many consumer and business loans – eight times.

“The statement paves the way for a return to 50bp growth at the March meeting, and if the data stream confirms a re-acceleration in both the labor market and inflation, it will surprise the January hike,” Morgan Stanley analysts noted. in a research note on Tuesday.

The prospect of a higher-than-expected interest rate hike sent U.S. markets lower on Tuesday, with the Dow down 0.9% to 33,120 and the S&P 500 down 1% in morning trade.

Even so, the central bank will have few additional details on inflation and the state of the economy before its next meeting, Jeffrey Roach, chief economist at LPL Financial, said in a research note on Tuesday. For example, the February jobs report is released on Friday, while last month’s inflation data is released on March 14.

“[S]”With February inflation looking a little softer than the previous month, the market may be overreacting at the moment,” Roach noted. “The Fed will have several key indicators before its next meeting, including another look at retail sales and inflation.

The Fed is ‘ready’ to raise the rate of growth.

Many economists and Wall Street investors had expected the Fed to hike by another quarter point at its next meeting. But according to futures markets in recent days, traders were more likely to see a half-point rise.

The Fed raised its benchmark interest rate by half a point in December and has made four three-quarter point hikes before that.

“We would be prepared to increase the pace of rate hikes if the body of data suggests that more rapid tightening is warranted,” Powell said.

In Tuesday’s speech, Powell walked back some of the optimism he had expressed about falling inflation after the Fed’s Feb. 1 meeting, noting that “the process of disinflation has begun,” and he referred to “disinflation” — broad and steadily slow. in inflation – several times. At that time, annual consumer price growth slowed for six months.

But after that meeting, the latest reading of the Fed’s benchmark inflation measure showed that consumer prices rose by the most in seven months from December to January. Reports on hiring, consumer spending and the broader economy also showed moderate growth.

Powell said on Tuesday that such economic indicators “partially reversed the softening trends we saw in the data a month ago.”

There is a trail ahead

The Fed chairman acknowledged that inflation has been “declining in recent months” but added that “the process of bringing inflation down to 2% has a long way to go and it may be difficult.”

Last week, several Fed officials said they would support raising the Fed’s key rate above the 5.1% it forecast in December if growth and inflation pick up. When the Fed raises its key rate, it usually makes mortgages, auto loans, credit card rates, and business loans more expensive. This is a trend that may slow down spending and inflation, but risks tipping the economy into recession.

Year-on-year inflation slowed to 6.4% from a June peak of 9.1%. But his progress stopped in January.

Powell noted that much of the slowdown in inflation so far has reflected supply chain disruptions that have allowed furniture, clothing, semiconductors and other physical goods to reach US shores. On the contrary, inflationary pressures are stable in many sectors of the economy’s broad service sector.

For example, rent and housing costs remain important drivers of inflation. In addition, the cost of renting a new apartment is also increasing much slowera trend that should moderate housing inflation by midyear, Powell said.

But prices for many services — from dining to hotel rooms to haircuts — are still rising rapidly, which doesn’t mean the Fed’s rate hikes will have an impact. According to Fed officials, the cost of these services mainly reflects salary and wage increases, which companies often pass on to their customers in the form of higher prices.

As a result, suppressing inflation may require “softer labor market conditions” — a euphemism — in the Fed’s monetary policy report to Congress, released alongside testimony by the Fed chairman. fewer jobs and more layoffs.

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