Pound slips as Powell warns of higher rates

STOCK markets slipped and the pound fell against the dollar after the head of the US central bank said a stronger economy could force interest rates higher than previously thought.

Jerome Powell, chairman of the Federal Reserve, said a stronger US economy meant policymakers had more work to do to keep a lid on price pressures. And he warned of a “bumpy” journey back to the central bank’s 2pcinflation target.

Mr Powell said: “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.”

Sterling dropped by as much as 1.5pc against the dollar to below $1.19, while global stock markets gave up earlier gains after Mr Powell said policymakers “would be prepared to increase the pace of rate hikes” if data indicated “that faster tightening is warranted”.

Mr Powell’s remarks also forced traders to reassess their bets on future rate rises, with money markets now pricing in a rate hike of 0.5 percentage points in March, up 0.25 percentage points from earlier in the day.

This would take the Federal Funds rate above 5pc for the first time since 2007.

Borrowing costs also rose, with yields on two-year Treasury bills up to their highest rate in 16 years.

Mr Powell described the jobs market as “extremely tight”, with the 3.4pc unemployment rate currently at its lowest since 1969.