Fed Chairman Powell says interest rates

Federal Reserve Chairman Jerome Powell on Tuesday warned that interest rates are likely to rise higher than central bank policymakers had expected.

Citing data earlier this year that shows that inflation has reversed the deceleration it emerged in late 2022 that the central bank governor warned of tighter monetary policy waiting to slow a growing economy.

“Recent economic data has come in stronger than expected, suggesting that the final level of interest rates is likely to be higher than previously expected.” Powell said in comments prepared for two appearances this week on Capitol Hill. “If all the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”

These comments have two implications: one, that the peak or terminal level of the federal funds rate is likely to be higher than the previous indication by Fed officials, and two, that the switch last month to a smaller quarter percentage point increase may be short-lived if inflation data continues to heat up.

In their December estimate, officials pegged the terminal rate at 5.1%. Current market pricing is a bit higher than that, in the 5.25%-5.5% range, according to data from CME Group. Powell did not indicate how high he thinks prices will ultimately go.

The speech comes with markets generally optimistic that the central bank can tame inflation without driving the economy into a ditch. Shares fell sharply while Treasury yields jumped after Powell’s comments were released.

Federal Reserve Chairman Jerome H. Powell testifies before a U.S. Senate Banking, Housing and Urban Affairs Committee hearing on “The Semiannual Monetary Policy Report to the Congress” on Capitol Hill in Washington, U.S., March 7, 2023.

Kevin Lamarque | Reuters

In contrast, the January data show that inflation is measured by personal consumption expenditure prices — the preferred measure for policymakers — was still running at a rate of 5.4% per year. That’s well above the Fed’s long-term target of 2% and a shade above December’s level.

Powell said the current trend shows the Fed’s inflation-fighting job is not over.

“We have covered a lot of ground, and the full effects of our austerity so far are not yet felt. Even so, we have more to do,” he said.

Powell will speak to the Senate Banking, Housing and Urban Affairs Committee on Tuesday and will then address the House Finance Committee on Wednesday.

The Fed has raised its benchmark interest rate eight times in the past year to its current target level of between 4.5%-4.75%. On its face, the fund rate indicates what the banks charge each other for lending overnight. But it carries through to a variety of other consumer debt products such as mortgages, car loans and credit cards.

In recent days, some officials, such as Atlanta Fed President Raphael Bostic, have indicated that they see rate hikes coming to an end soon. However, others, including Gov. Christopher Waller, have expressed concern over the latest inflation data and say tight policy is likely to remain in place.

“Restoring price stability will likely require us to maintain a tight monetary policy stance for some time,” Powell said. “The historical document strongly warns against prematurely loosening the policy. We will stay the course until the job is done.”

Powell noted some progress on inflation for areas such as housing.

But he also noted “there is little sign of disinflation” when it comes to the important category of services such as spending excluding housing, food and energy. That’s an important qualification given that the chairman said in his post-meeting news conference in early February that the disinflationary process had begun in the economy, comments that helped send stocks higher.

Markets mostly expect the Fed to adopt a second straight quarter-point, or 25 basis point, rate hike at the Federal Open Market Committee meeting later this month. But traders are pricing in a near 30% probability of a higher half-point gain, according to CME Group data.

Powell reiterated that interest rate decisions will be made “meeting by meeting” and will depend on data and their impact on inflation and economic activity, rather than a preset rate.