The Fed’s Jerome Powell says data will determine the size of the next rate hike

Mr Powell said government reports on February hiring and inflation to be released next week will determine the outcome of the March 21-22 meeting.

“I emphasize that no decision has been made on this matter yet,” said Mr. Powell to the House Financial Services Committee. He added those words ad lib to his opening remarks that were otherwise identical to testimony given Tuesday in the Senate, when he said officials were willing to pass a larger rate hike if warranted by “the totality of the data.” .

His remarks indicated that Fed officials will discuss whether to raise rates by a quarter point, as they did last month, or by a larger half point, as they did in December.

They raised their benchmark federal funds rate to a range between 4.5% and 4.75% last month, their latest hike aimed at fighting inflation by slowing the economy. They slowed the pace of rate hikes at their past two meetings after raising 0.75 points at four consecutive meetings last year.

Officials have spent the past 2½ months emphasizing the benefit of slowing interest rate hikes so they can better evaluate the impact of their previous moves and explaining why the final level of interest rates was more important than the size of the increase during a particular meeting. They have used quarterly interest rate forecasts – which will be updated in two weeks at their meeting – to guide investors on their near-term intentions.

That had convinced many investors that the Fed had adopted a strategy of raising rates in quarter-point increments until officials saw enough evidence that the economy was slowing to suspend rate hikes. So when Mr. Powell’s announcement on Tuesday that a half-point rate hike was in the works led to a significant shift in market expectations.

Mr. Powell opened the door to a bigger rate hike this week after several economic reports showed that January hiring, spending and inflation were hotter than expected. Just as importantly, data revisions showed that inflation and labor demand did not weaken as much as initially reported at the end of last year.

Employers added 517,000 jobs in January, a surge that shocked economists who expected hiring to slow. The Labor Department will report this Friday on the February hiring.

Meanwhile, the fall in inflation stopped in January at the end of last year. 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.

The data surprised the Fed, which has been trying 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.

The economy’s seemingly subdued response to the Fed’s aggressive rate hikes last year reflects the unusual dynamics brought about by the pandemic and the government’s policy response. “Today’s economy is not as interest-rate sensitive as it has been in recent decades, and its resilience, while a virtue, complicates things for the Fed,” said Rick Rieder, BlackRock. from Inc

Chief Investment Officer of Global Fixed Income.

Market expectations of half a point or 50 basis points for a rate hike by the Fed rallied higher on Wednesday after Mr. Powell and after a government report showed job openings remained high in January.

“The threshold for them to fall short of 50 is very high given the way the data comes in,” said Diane Swonk, chief economist at KPMG. “So far, all data remains on the 50 side.”

Mr. Powell could be given a daunting task of forging consensus among the 18 policymakers who participate in the Fed’s rate-setting meetings. A shift to a larger rate hike could spark backlash from some officials who had felt uncomfortable raising rates in larger increments and create confusion about the central bank’s strategy.

“This is about creating optionality,” Ms. Swonk said. While it may be embarrassing for the central bank to accelerate rate hikes just after they’ve slowed down, “it’s more humiliating to get the overall policy wrong. It is important when you say that you are data dependent to change your data.

Mr. Powell reiterated on Wednesday that Fed officials are likely to hike rates higher this year than previously expected to bring inflation under control. In December, most of them thought they would raise their benchmark federal funds rate to between 5% and 5.5% this year and keep it there until 2024.

Several forecasters now expect the Fed’s projection rate to rise to around 5.75% this year. The strength of the labor market and signs of more stubborn inflation create “a fair chance that the Fed will have to raise the fed-funds rate to 6% and hold it there for an extended period of time to slow the economy and bring inflation back.” bring it to almost 6%. 2%,” Mr Rieder said.

The Fed last raised interest rates to 5.25% in 2006, and rates have not been above that level since 2001.

If the Fed moves the Fed Funds rate closer to 6%, the likelihood of a more serious downturn increases “quite dramatically,” Ms. Swonk said.

While the risk of a recession in an election year could give Democrats heartburn as President Biden prepares for re-election, Mr. Powell received few complaints from lawmakers over two days of congressional testimony, suggesting little political backlash for now.

“While rates have risen significantly over the past year, most members supported Chairman Powell’s continued fight against inflation, and few criticized him,” said Andrew Olmem, a partner at Mayer Brown and former senior adviser on Republicans in the US. Senate Banking. Commission.

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