Federal Reserve Chairman Jerome Powell set the stage for more interest rate hikes during his Semiannual Monetary Policy testimony before Congress on Tuesday.
Expectations that the U.S. Central Bank would slow the pace of future interest rate increases were dashed following a grim warning from Powell that larger rate hikes would be necessary to tame inflation.
During the first part of his two-day testimony, Powell suggested that January’s stronger-than-expected jobs report and consumer spending numbers had caused Fed members to reevaluate approving a 50-basis point increase during the next Federal Open Market Committee (FOMC) meeting on March 21-22.
“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 told the Senate Banking Committee. “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”
At the beginning of February, Fed officials approved their eighth rate hike and their first 25-basis point increase since March 2022, lifting the Fed’s benchmark rate to a range between 4.5% and 4.75%, according to data from the New York Fed.
Given Powell’s hawkish tone during the first day of his testimony, economists are now anticipating an effective federal funds rate closer to 6%,
At the start of February, the Fed was seeing evidence to support slower rates, Powell said. That has since changed.
“We’re looking at a reversal of what we thought we were seeing,” he explained. There is “nothing about the data that suggests the Fed has tightened too much,” especially given that inflationary pressures are running hotter than expected ahead of the Fed’s next policy meeting, he added.
Last year, Senator Elizabeth Warren grilled Powell over the Fed’s handling of inflation and the forecast by members that inflation would be transitory.
In Tuesday’s hearing, Warren again blasted Powell over the Fed’s interest rate trajectory and concerns that the Fed’s actions would lead to significant job losses during a period in which a record number of Americans are relying on credit card debt to get by.
“Will working people be better off if we just walk away from our jobs and inflation remains 5%-6%?” responded Powell.