Fed may increase pace of interest rate hikes, says Powell – 07/03/2023 – Market

The Federal Reserve will likely need to raise rates more than expected in response to recent strong US economic data and is prepared to move forward with greater strides if the aggregate of information received suggests tougher measures to control inflation, the chair said. of the Fed, Jerome Powell, to the US Congress this Tuesday (7).

“The latest economic data came in stronger than expected, which suggests that the ultimate rate level may be higher than previously anticipated,” Powell said in prepared remarks for a hearing before the Senate Banking Committee.

While some of this unexpected economic strength may have been due to warm weather and other seasonal effects, Powell said the Fed is aware that it could also be a sign that the central bank needs to do more to curb inflation, perhaps even picking it up again. rates at hikes greater than 0.25 percentage point, the level the authorities planned to follow.

“If the totality of the data indicates that a faster tightening is warranted, we will be prepared to increase the pace of rate hikes,” Powell said.

Tuesday’s comments were Powell’s first since inflation unexpectedly spiked in January and mark a strong acknowledgment that a “disinflationary process” he spoke of repeatedly at a Feb. no surprises.

“SURPRISINGLY HAWKISH”

Powell’s remarks, strongly indicating that Fed officials will project a higher endpoint for the central bank’s overnight benchmark interest rate at the next meeting on March 21-22, prompted a rapid reassessment in bond markets, with investors pushing the odds above 70% that the Fed will approve a 50 percentage point increase at its next meeting. Equity markets fell and the dollar traded higher.

The release on March 10 of the US Labor Department’s jobs report for February and an inflation report next week will be important data shaping this outcome.

The Fed’s benchmark interest rate is currently in the range of 4.50% to 4.75%. In December, officials projected that rate would rise to around 5.1% at its peak, a range that investors now see could rise by at least 50 percentage points.

Powell will speak before the House of Representatives Financial Services Committee again on Wednesday.

“LONG WAY TO GO”

Powell’s hearing and testimony focused on an issue that is now at the center of the Fed’s discussions as officials try to determine whether recent data will prove to be an outlier or eventually signal that inflation remains tighter than expected. was thought, justifying a tougher Fed response.

While Powell said he thought the Fed’s 2% inflation target could still be met without dealing a major blow to the US job market, he acknowledged in his testimony and in responses to senators’ questions that “there will very likely be some easing in conditions in the labor market”.

How much these conditions will ease is not yet clear, but Powell said the focus will remain more squarely on how inflation behaves.

“The process of bringing inflation down to 2% has a long way to go and is likely to be bumpy,” Powell said. He added later at the hearing that “the social costs of failure are very, very high”.