Fed Chair Powell says rates of interest “are more likely to be larger” than beforehand thought

Federal Reserve Chairman Jerome Powell warned on Tuesday that interest rates are likely to be higher than central bank policymakers had anticipated.

Citing data earlier this year showing inflation has reversed the slowdown seen in late 2022, the central bank governor warned tightening monetary policy to slow a growing economy.

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“Recent economic data is stronger than expected, suggesting that the final interest rate level will likely be higher than previously expected,” Powell said in a remark prepared for two appearances on Capitol Hill this week. “If the body of data suggested that faster tightening was warranted, we would be willing to increase the pace of rate hikes.”

These remarks have two implications: first, that the peak, or ending, level of the Federal Funds Rate is likely to be higher than what Fed officials had previously said, and second, that last month’s move to a smaller quarter-point increase could only be by be short-lived if inflation data continues to heat up.

In their December estimate, officials set the final interest rate at 5.1%. Current market prices rose to a range of 5.5% to 5.75% after Powell’s comments, according to data from CME Group. Powell didn’t specify how much he thinks interest rates will eventually rise.

The speech comes with markets generally optimistic that the central bank can tame inflation without driving the economy into a ditch. Stocks fell sharply while Treasury yields surged following the release of Powell’s comments.

Federal Reserve Chairman Jerome H. Powell says before a hearing of the US Senate’s Committee on Banking, Housing and Urban Affairs on the Semiannual Monetary Policy Report to the Congress on Capitol Hill in Washington, United States, April 7: March 2023 out.

Kevin Lamarque | Reuters

January data shows that inflation, as measured by personal consumption prices – the preferred metric for policymakers – was still at a pace of 5.4% a year. That’s well above the Fed’s long-term target of 2% and a tad above December levels.

Powell said the current trend shows the Fed’s work on fighting inflation isn’t over yet, although he noted some of the hot January inflation data could be the product of unseasonably warm weather.

“We have achieved a lot and the full effects of our tightening to date are not yet being felt. Still, we still have work to do,” he said, adding that the road to get there could be “bumpy.”

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

The chairman faced some backlash from Senate panel Democrats, who blamed inflation on corporate greed and price gouging and said the Fed should reconsider its rate hikes. Sen. Elizabeth Warren, D-Mass., a frequent Powell critic, accused the Fed’s inflation target would put 2 million people out of work.

“We’re taking the only action we have to bring inflation down,” Powell said. “Will working people be better off if we just quit our jobs if inflation stays at 5.6%?”

The Fed raised its key interest rate eight times in the past year to the current target level of between 4.5% and 4.75%. At first glance, the overnight rate determines which banks charge each other for overnight loans. But it’s impacting a variety of other consumer credit products, like mortgages, auto loans, and credit cards.

In recent days, some officials, such as Atlanta Fed President Raphael Bostic, have indicated that they see interest rate hikes coming to an end soon. However, others, including Gov. Christopher Waller, have expressed concern over the latest inflation data, saying the tightening policy is likely to remain in place.

“Restoring price stability will likely require us to maintain a tight monetary policy stance for some time,” Powell said. “The historical record strongly warns against relaxing policies prematurely. We will stay the course until the job is done.”

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

However, he also noted that there is “little sign of disinflation” when it comes to the important service spending category, with the exception of housing, food and energy. That’s an important criterion considering the chairman said at his post-meeting press conference in early February that the process of fighting inflation in the economy had begun, remarks that helped push shares higher.

Markets had largely been expecting the Fed to announce a second straight rate hike of a quarter point, or 25 basis points, at the Fed’s FOMC meeting later this month. As Powell spoke, however, markets were pricing in a more than 50% chance of a half-point hike in the March 21-22 session, according to data from CME Group.

Powell reiterated that interest rate decisions will be made “meeting by session” and will depend on data and its impact on inflation and economic activity, not a preset course.