Jerome Powell testifies before Congress on outlook for interest rates and inflation

The Fed last month raised its benchmark federal funds rate by a quarter of a percentage point to a range between 4.5% and 4.75% in an effort to ease price pressures by cooling the economy. It slowed the pace of rate hikes after increases of a larger half point in December and 0.75 point in November.

The Fed has tried to curb investment, spending and hiring by raising rates, making it more expensive to borrow and allowing the price of assets such as stocks and real estate to fall. The fed-funds rate influences other borrowing costs throughout the economy.

In December, most Fed officials believed they would raise the fed-funds rate to between 5% and 5.5% this year and keep it there until 2024. They will submit new forecasts at the upcoming meeting.

At a press conference on Feb. 1, Mr. Powell suggested that if the economy slowed as officials expected, they could raise interest rates by a quarter of a percentage point at each of their meetings in March and May.

But he also warned that they could raise rates more if the economy turns surprisingly strong.

“We are going to carefully review the data coming in between now and the March meeting,” said Mr. Powell at the press conference. “If we came to the view that we should raise rates beyond what we said in December, we certainly would.”

Since he made those comments, several economic reports have revealed that hiring, spending and inflation were hotter in January; moreover, revisions showed that inflation and labor demand did not decline as much as initially reported late last year.

As a result, several other Fed officials have signaled that they could raise rates more this year than previously expected. Three regional Fed bank governors have said they could have supported a bigger hike of half a point last month or would do so at the upcoming meeting.

The recent strong economic data has changed investors’ interest rate expectations. When the Fed last met on Feb. 1, investors in interest rate futures markets expected officials to raise Fed Funds rates just once more this year, to a peak of 4.9%, and begin cutting them this fall. Investors on Monday were expecting the rate to rise to about 5.5% by mid-year and stay there through the end of 2023, according to CME Group.

Investors will appreciate the language of Mr. Keep a close eye on Powell for clues as to whether the Fed is likely to raise rates by a quarter point, as widely expected, or if he could indicate he is open to a larger half-point hike.

Mr Powell could face restrictions in leading markets this week as two highly viewed economic reports that could influence officials’ deliberations will be released after he testifies and before the next meeting. The Labor Department will report Friday on February hirings. Next week it will publish its February inflation report.

Employers added 517,000 jobs in January, a figure that shocked economists who expected job hiring to slow, while the unemployment rate fell to 3.4%, the lowest point in 53 years. Friday’s labor report could provide clues as to whether the gains were an outlier or a sign of an economy that is accelerating.

The fall in inflation at the end of last year stopped in January. The 12-month inflation rate, excluding volatile food and energy products, was 4.7%, up from 4.6% in December, as measured by the Department of Commerce’s Personal Consumption Price Index.

After holding Fed Funds rates near zero after the pandemic hit the US economy, officials have raised rates more in the past 12 months than at any time since the early 1980s. Officials have slowed the pace of the increases to see the effects of their steps.

Tuesday’s hearing marks the first appearance of Mr. Powell before Congress since last June, when the Fed raised the Fed funds rate to a range between 1.5% and 1.75%.

A handful of Democratic lawmakers who consistently downplayed inflation concerns in 2021 have warned Mr. Powell not to raise rates too quickly or too high. They have expressed concern about the Fed leader being too eager to slow the economy by aiming for an increase in unemployment.

Write to Nick Timiraos at Nick.Timiraos@wsj.com