Fed’s Powell sets the table for higher and possibly faster rate hikes

WASHINGTON, March 7 (Reuters) – The Federal Reserve is likely to have to raise interest rates more than expected in response to the latest strong data and is poised to take bigger steps if the “totality” of incoming information suggests that tougher measures are needed to control inflation, Fed Chairman Jerome Powell told US lawmakers on Tuesday.

“Recent economic data has come in stronger than expected, suggesting that the ultimate level of interest rates is likely to be higher than previously expected,” the US central bank chief said in his biannual testimony before the Senate Banking Committee.

While some of the unexpected economic strength may have been due to warm weather and other seasonal effects, Powell said it could also be a sign that the Fed needs to do more to tame inflation, perhaps even returning to larger interest rate increases than the quarterly percentage-point increments officials intended to use going forward.

“Should all the data indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,” Powell said.

The comments were Powell’s first since inflation rose unexpectedly in January and marked a strong acknowledgment that the “disinflationary process” he spoke of repeatedly at a Feb. 1 news conference was not going smoothly.

Senators responded with a wide range of questions, pointing to criticism of whether the Fed correctly diagnosed the inflation problem and whether price pressures could be tamed without significant damage to economic growth and the labor market.

Democrats on the committee focused on the role high corporate profits can play in persistent inflation, with Sen. Elizabeth Warren of Massachusetts charging that the Fed was “gambling with people’s lives” through rate hikes that the central bank’s latest projections would lead to. the unemployment rate rises by more than a percentage point—a loss previously associated with economic recessions.

“You claim there is only one solution: Lay off millions of workers,” Warren said.

“Will working people be better off if we just walk away from our jobs and inflation measures?” Powell replied.

“Raising interest rates is certainly not going to stop business from taking advantage of all these crises to raise prices,” said Sen. Sherrod Brown, an Ohio Democrat who chairs the committee.

Republicans focused on whether energy policy was limiting supply and keeping prices higher than necessary, and whether limited federal spending could help the Fed’s case.

“The only way to get this sticky inflation down is to attack it on the monetary side and the fiscal side. The more we help on the fiscal side, the fewer people you have to put out of work,” said Senator John Kennedy. a Republican from Louisiana.

“It could work that way,” said Powell, who at a separate point in the hearing agreed with Democratic lawmakers’ claims that lower corporate profits could help lower inflation and with Republicans’ arguments that more energy production could help to lower prices.

“It’s not up to us to point fingers,” the Fed chief said.

‘SURPRISINGLY HOOKY’

Powell’s remarks, which virtually assured that Fed officials will project a higher endpoint for the central bank’s benchmark overnight rate at the upcoming meeting on the 21st-22nd. in March, triggered a quick repricing in bond markets as investors increased bets that the Fed would approve a half-percent rate. -point interest rate increase when they meet in two weeks.

The Fed’s key interest rate is currently in the range of 4.50%-4.75%. As of December, officials saw the rate rise to a high of around 5.1%, a level investors expect could move at least half a percentage point higher now.

Equity markets extended initial losses and ended the day significantly lower, with the S&P 500 (.SPX) index down more than 1.5%. The US dollar also rose and yields on the 2-year Treasury rose above 5% – the highest since 2007.

Powell’s statement was “surprisingly hawkish,” said Michael Brown, a market analyst at TraderX in London. With a 50 basis point rate hike now in play, Brown said a strong monthly jobs report on Friday would likely lead to “calls for a terminal rate of 6%,” nearly a percentage point higher than Fed officials had forecast in December.

The March 10 release of the Labor Department’s jobs report for February and an inflation report next week were cited by Powell as important in shaping what the Fed does at its next meeting.

Powell will testify again on Wednesday before the US House Financial Services Committee.

‘LONG WAY TO GO’

The hearing and Powell’s testimony sharpened an issue now at the center of the Fed’s discussions as officials try to decide whether the latest data will turn out to be a “blip” or end up signaling that inflation remains stickier than assumed and warrants a tougher response from the Fed.

In his testimony, Powell noted that much of the impact of the central bank’s monetary policy may still be in the pipeline, with the labor market still maintaining a 3.4% unemployment rate not seen since 1969 and strong wage gains.

While Powell said he believed the Fed’s 2% inflation target could still be reached without dealing a major blow to the US labor market, he acknowledged on Tuesday that “there will very likely be some softening in labor market conditions.”

How much remains unclear, but Powell said the focus will remain more directly on how inflation is behaving.

Inflation has fallen since Powell’s last appearance in Congress. After peaking at an annual rate of 9.1% in June, the CPI fell to 6.4% in January; the separate price index for personal consumption expenditures, which the Fed uses as the basis for its 2% target, peaked at 7% in June and had fallen to 5.4% in January.

But that’s still too high, Powell said.

“The process of getting inflation back to 2% has a long way to go and is likely to be bumpy,” Powell said, adding later in the hearing that “the social cost of failure is very, very high.”

Reporting by Howard Schneider; Additional reporting by Saqib Ahmed Editing by Dan Burns, Nick Zieminski and Paul Simao

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