Federal Reserve Chair Jerome H. Powell testifies before a U.S. Senate
Banking, Housing, and Urban Affairs Committee hearing on “The Semiannual
Monetary Policy Report to the Congress” on Capitol Hill in Washington, U.S.,
March 7, 2023. Kevin Lamarque | Reuters
- On Tuesday, Jerome Powell, the chairman of the Federal Reserve, issued a warning that interest rates may rise sooner than anticipated.
- The head of the central bank stated in prepared remarks for appearances this week on Capitol Hill that "we would be prepared to increase the pace of rate hikes" if the sum of the evidence showed that faster tightening was necessary.
- According to Powell, the present trajectory indicates that the Fed's work battling inflation is not yet complete.
On Tuesday, Jerome Powell, the chairman of the Federal Reserve, issued a warning that interest rates may rise sooner than anticipated.
Citing data earlier this year suggesting that inflation has reversed the reduction it showed in late 2022, the central bank governor warned of stricter monetary policy ahead to halt a booming economy.
Powell made the statement in remarks prepared for two visits this week on Capitol Hill. "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. "We would be willing to increase the pace of rate hikes if the sum of the data were to indicate that greater tightening is needed."
Their comments imply two things: first, that the federal funds rate's peak or terminal level will likely be higher than the Fed officials had previously predicted; and, second, that the change from a larger to a smaller increase last month may not persist long if inflation figures remain strong.
Officials estimated the terminal rate to be 5.1% in December. Following Powell's comments, current market price increased to a range of 5.5%-5.75%, according to data from the CME Group. Powell did not say how high he expects rates to rise in the end.
Markets are typically upbeat going into the speech because they believe the central bank can control inflation without driving the economy into the ground.
Following the publication of Powell's comments, stocks dropped significantly and Treasury yields increased. When the Federal Open Market Committee meets on March 21–22, there is a significant likelihood that interest rates will increase by 0.5 percentage points, according to market pricing.
According to data from January, inflation was still averaging 5.4% yearly as measured by personal consumption expenditures prices, the favored metric for policymakers. That is a significant increase from December's level and well beyond the Fed's long-term aim of 2%.
Although pointing out that part of the strong January inflation figures may have been caused by the exceptionally warm weather, Powell said the current trend indicates that the Fed's work in combating inflation is not yet complete.
"We've come a long way, and we haven't yet really felt the results of our tightening. We still have a lot of work to do, he continued, adding that it might be a "bumpy" journey.
Powell will face the House Financial Services Committee on Wednesday after speaking to the Senate Banking, Housing, and Urban Affairs Committee on Tuesday.
Democrats on the Senate committee who argued that the Fed should reconsider its rate hikes and blamed corporate greed and price gouging for inflation pushed back against the chairman. Sen. Elizabeth Warren, D-Mass., a vocal opponent of Powell, said that the Fed's inflation targets will result in the unemployment of 2 million Americans.
Powell claimed that the techniques being used to lower inflation are the only ones available. If inflation stays at 6%, will working people be better off if we just quit our jobs?
Throughout the course of the previous year, the Fed increased its benchmark fund rate eight times, bringing it to its current targeted range of 4.5%–4.75%. The funds rate, on the surface, determines how much banks charge one another for overnight lending. Yet it also feeds into a wide range of other consumer debt products, including credit cards, mortgages, and auto loans.
Raphael Bostic, president of the Atlanta Fed, and other officials have recently stated that they believe the rate hikes will shortly come to an end. Others, such as Governor Christopher Waller, have expressed alarm over the most recent inflation numbers and claim that a strict policy will probably continue.
Powell stated that maintaining a tight stance of monetary policy for some time would be necessary to restore price stability. "The historical evidence clearly advises against easing policy too soon. Till the project is completed, we will not budge.
Powell noted some improvement in areas like housing where there was inflation.
But, he also stated "there is little trace of disinflation" when it comes to the critical category of services spending excluding housing, food and energy. This qualifier is crucial in light of the chairman's statement that the disinflationary process had started in the economy during his post-meeting news conference in early February, which helped boost stock prices.
At the Federal Open Market Committee meeting later this month, the markets largely anticipated that the Fed will hike interest rates by a second consecutive quarter-point, or 25 basis points. According to CME Group data, markets had already factored in a 69% chance of a greater half-point hike at the March meeting as Powell was speaking.
Powell reaffirmed that rather than following a predetermined path, rate decisions will be made "meeting by meeting" and will be based on data and their effects on inflation and economic activity.