During a congressional appearance on Tuesday, Jay Powell warned that the US Federal Reserve is ready to return to bigger rate hikes to fight inflation.
In his first public intervention since the release of data showing that the central bank was struggling to cool the US economy despite a years-long campaign of monetary tightening, the Fed chairman signaled his willingness to hike interest rates to counter sustained price increases. to go.
Powell told the Senate banking committee that “final interest rate levels will likely be higher than previously expected” and said recent economic data was “stronger than expected.”
He added: “If the totality of the data indicated that faster tightening is warranted, we would be willing to step up the pace of rate hikes.”
The Fed chairman’s comments led to a sell-off in the stock market, with the S&P 500 losing 1.65 percent in midday trading in New York, while the Nasdaq fell 1.4 percent. Yields on two-year Treasury bills, which are moving in line with market expectations, rose 5 percent to the highest level since 2007.
Traders upped their bets on a half-point rate hike at the Fed’s March 21-22 meeting, with the odds now greater than a quarter-point hike, according to the CME Group.
The central bank reduced the size of its rate hikes from 0.75 percentage point between June and November to half a point in December. It shifted back to a more traditional quarter-point increase in February.
The Fed’s key interest rate is now in a target range of between 4.5 percent and 4.75 percent, compared to near zero at this time last year. In December, Fed officials predicted interest rates would peak at 5.1 percent this year.
But Powell’s comments indicate that he is willing to push the economy further to reduce inflation.
His aggressive rhetoric echoes statements by Christine Lagarde, president of the European Central Bank, who warned over the weekend that price pressures were “sticky” and require further action to tackle the inflation monster. Financial markets now expect European interest rates to rise from 2.5 percent to above 4 percent.
In contrast, Andrew Bailey, Governor of the Bank of England, has been careful not to give precise guidance on UK interest rates.
Two critical publications due ahead of the Fed’s meeting this month will help inform its next rate decision: Friday’s monthly jobs report and February’s consumer price index report, due next week.
Investors and economists will have to wait and see whether the recovery in the labor market and consumer demand continued in January last month. Powell said the hot data “likely reflects the unusually warm weather” but also indicates that “inflationary pressures are higher than expected”.
Democrats have become increasingly fearful that the Fed will go too far in tightening monetary policy, triggering a recession that could undermine many of the labor market gains made during the recovery from the coronavirus pandemic. But Powell insisted that getting core inflation from January’s 4.7 percent level to the Fed’s 2 percent target would “very likely” require “some easing of labor market conditions,” pointing to job losses in it is coming.
“We can’t risk undermining any of the successes of our current economy,” said Sherrod Brown, chairman of the Senate banking committee.
Massachusetts progressive Democrat Elizabeth Warren accused Powell of “gambling with life”.
When asked by Warren whether Americans at risk of losing their jobs should just “put up with it,” Powell replied, “Will working people be better off if we just walk away from our jobs and inflation stays above 6 percent?”
He added that the “social cost of failure” for inflation was “very, very high” and warned of the risk of the “psychology” of “self-perpetuating” inflation.
In a separate conversation with John Kennedy, the Republican senator from Tennessee, Powell rejected the idea that reducing inflation would push the unemployment rate above 10 percent.
Instead, he said the Fed saw a “path” to bring inflation under control “with less significant effects on the labor market.”
Powell also faced questions about banking regulation, with Democrats pressuring the Fed to tighten capital standards for the largest institutions, and Republicans calling for looser treatment. Michael Barr, the Fed’s vice chairman of oversight, is leading a review of capital rules.
Additional reporting by Tommy Stubbington and Chris Giles