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The Federal Reserve may increase the size of its interest rate hikes and raise borrowing costs to higher levels than previously reported if evidence continues to point to a strong economy and persistently high leverage, Chairman Jerome Powell said. for a Senate committee Tuesday.
“The new economic data is stronger than expected, which suggests that the highest level of interest rates may be higher than previously predicted,” Powell testified to the Senate Banking Committee. “If the aggregate data indicates that a faster stabilization is warranted, we will be prepared to increase the pace of rate cuts.”
Powell’s comments marked a sharp change in economic outlook since the Fed’s most recent policy meeting in early February. At that meeting, the central bank raised its key rate by a quarter-point, dropping after a quarter-point hike in December and four quarterly hikes before that.
The Fed chairman’s comments on Tuesday raised the prospect that the Fed will increase its benchmark rate by a half-percentage point at its next meeting on March 21-22. Last year, the central bank raised its key rate, which affects most consumer and business loans, eight times.
At their next meeting, Fed officials will also issue updated forecasts for how high they expect their benchmark rate to end. In December, they predicted that it would reach a rate of 5.1% later this year. Powell’s latest comments suggest the Fed may raise it even higher. Futures pricing indicates that investors now expect it to rise by half a point further, to 5.6%.
The Fed chairman’s warning of more aggressive moves strengthened sentiment on Wall Street, where stock prices fell in the hours after Powell began speaking. In intraday trading, the broader S&P 500 index was down about 1.6%.
“The established perception is that they will hike (a half point) in March, unless they are convinced otherwise,” said Derek Tang, an economist at LHMeyer, an economic consulting firm. affect.
The prospect of higher borrowing costs tends to raise concern among economists and investors. Rising rates can’t cool consumers and business spending, depressing growth and inflation; they can also send the economy into recession.
During Tuesday’s hearing, Democratic senators emphasized their belief that today’s high prices are due to a combination of continued supply chain disruptions, Russia’s invasion of Ukraine and higher corporate profit margins. Many argue that further rate hikes will throw millions of Americans out of work.
Sen. Elizabeth Warren, Democrat of Massachusetts, noted that Fed officials have predicted that the unemployment rate will reach 4.6% by the end of this year, from 3.4% now. Historically, when the unemployment rate has risen by less than 1 percentage point, a recession has followed, he noted.
“If you could speak directly to two million hard-working people who have decent jobs today, who are planning to be laid off in the next year, what would you tell them?” Warren asked.
“We don’t think we need to see a sharp or dramatic increase in unemployment to get inflation under control,” Powell replied. “We’re not focused on any of that.”
By contrast, congressional Republicans mainly blame President Joe Biden’s policies for high inflation and argue that if government spending is cut, inflation will slow.
“If Congress lowers the rate of growth in your spending, and lowers the rate of growth in your debt collection, will that make your job easier in reducing inflation?” Sen. John Kennedy, Republican of Louisiana, asked.
“I don’t think fiscal policy right now is a big factor driving inflation,” Powell replied. But he also acknowledged that if Congress reduces the deficit, that “could” help slow revenue growth.
Powell walked back some pessimistic comments about reducing inflation that he had made after the Fed’s Feb. meeting. term. During that time, year-over-year consumer price growth has slowed for six straight months.
But after that meeting, the latest reading of the Fed’s inflation rate showed that consumer prices rose from December to January by the most in seven months. And reports on hiring, consumer spending and the broader economy have also shown that growth is healthy.
Such economic figures, Powell said on Tuesday, “reverse the soft trends that we have seen in the data a month ago.”
The Fed chairman also said that inflation “has been moderating in recent months” but added that “the process of getting inflation back to 2 percent has a long way to go and is likely to be difficult.” Inflation, as measured year over year, has slowed from its peak in May of 9.1% to 6.4%.
Several Fed officials said last week that they would favor raising the Fed’s key rate above the 5.1% level they had projected in December if growth and inflation remained elevated.
Powell noted that so far, much of the slowdown in inflation reflects the opening of supply chains that have allowed more furniture, textiles, semiconductors and other physical goods to reach US shores. In contrast, inflationary pressures are based in many areas of the service sector of the economy.
Rent and housing costs, for example, are major drivers of inflation. At the same time, the cost of a new apartment building is growing more slowly, a trend that should reduce housing inflation by midyear, Powell said.
But the prices of many services – from meals to hotel rooms to haircuts – are still rising rapidly, with little sign that the Fed’s rate hikes have had an impact. Fed officials say the costs of those services primarily reflect higher wages and salaries, which companies often pass on to their customers in the form of higher prices.
As a result, the Fed’s monetary policy report to Congress, which was issued in conjunction with the president’s testimony, said that inflation would necessitate “softer labor market conditions” — a euphemism for fewer and fewer job openings. more layoffs.
Senators from both parties also asked Powell about the Fed’s view on cryptocurrencies and what steps it has taken as a financial regulator on digital assets.
“What we saw was, you know, a lot of chaos,” Powell said. “We see fraud, we see lack of transparency, we see operational risk, lots and lots of things like that.”
As a result, Powell said, the Fed is encouraging managed banks to exercise “great care in the ways they deal with the entire crypto space.”
At the same time, he said, “We have to be open to the idea that somewhere out there, there is a technology that can be featured in a manufacturing innovation that makes people’s lives better.”
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