Powell says Fed could increase rate hike size
The Federal Reserve could increase the size of its interest rate hikes and raise borrowing costs to higher levels than previously projected if evidence continues to point to a robust economy and persistently high inflation, Chairman Jerome Powell told a Senate panel Tuesday.
“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” Powell testified to the Senate Banking Committee. “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”
Powell’s comments reflect a sharp change in the economic outlook since the Fed’s most recent policy meeting in early February. At that meeting, the central bank raised its key rate by just a quarter-point, downshifting after a half-point rise in December and four threequarter-point hikes before that.
The Fed chair’s remarks Tuesday raised the real possibility that the Fed will increase its benchmark rate by a half-percentage point at its next meeting March 21-22. Over the past year, the central bank has raised its key rate, which affects many consumer and business loans, eight times.
At their forthcoming meeting, Fed officials will also issue updated forecasts for how high they expect their benchmark rate to ultimately reach. In December, they forecast that it would reach about 5.1% later this year. Powell’s latest remarks suggested that the Fed could raise it even higher. Futures pricing indicates that investors now expect it to rise a half-point further, to 5.6%.
The Fed chair’s warning of potentially more aggressive moves darkened the mood on
“We actually don’t think that we need to see a sharp or enormous increase in unemployment to get inflation under control. We’re not targeting any of that.”
— FEDERAL RESERVE CHAIRMAN JEROME POWELL
Wall Street, where stock prices tumbled in the hours after Powell began speaking.
The S&P 500 dropped 1.5% for one of its worst days of the year so far. The Dow Jones Industrial Average lost 574 points, or 1.7%, while the Nasdaq composite fell 1.2%.
After sitting at virtually unchanged levels just before Powell’s testimony, stocks fell immediately afterward.
“This is the market coming back to realistic expectations,” said Megan Horneman, chief investment officer at Verdence Capital Advisors. “I think it’s going to continue to wash out some of the excesses in the market.”
The prospect of increasingly high borrowing costs tends to generate concern among economists and investors. Rising rates can not only cool consumer and business spending, weaken growth and slow inflation; they can also send the economy sliding into a recession.
“The presumption that’s been established is that they will hike (a halfpoint) in March, unless they are convinced otherwise,” said Derek Tang, an economist at LHMeyer, an economic consulting firm.
During Tuesday’s hearing, Democratic senators stressed their belief that today’s high inflation is due mainly to the combination of continued supply chain disruptions, Russia’s invasion of Ukraine and higher corporate profit margins. Several argued that further rate hikes would throw millions of Americans out of work.
Sen. Elizabeth Warren, Democrat of Massachusetts, noted that Fed officials have projected that the unemployment rate will reach 4.6% by the end of this year, from 3.4% now. Historically, when the jobless rate has risen by at least 1 percentage point, a recession has followed, she noted.
“If you could speak directly to the 2 million hardworking people who have decent jobs today, who you’re planning to get fired over the next year, what would you say to them?” Warren asked.
“We actually don’t think that we need to see a sharp or enormous increase in unemployment to get inflation under control,” Powell responded. “We’re not targeting any of that.”
By contrast, the committee’s Republicans mainly blamed President Joe Biden’s policies for high inflation and argued that if government spending were cut, inflation would slow.
“If Congress reduced the rate of growth in its spending, and reduced the rate of growth in its debt accumulation, it would make your job easier in reducing inflation?” Sen. John Kennedy, Republican of Louisiana, asked.
Powell walked back some of the optimistic comments about declining inflation he had made after the Fed’s Feb. 1 meeting, when he noted that “the disinflationary process has started” and he referred to “disinflation” — a broad and steady slowdown in inflation — multiple times. At that time, yearover-year consumer price growth had slowed for six straight months.
But after that meeting, the latest reading of the Fed’s preferred inflation measure 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 indicated that growth remains healthy.
Such economic figures, Powell said Tuesday, “have partly reversed the softening trends that we had seen in the data just a month ago.”