Powell signals increased rate hikes if economy stays strong

WASHINGTON (AP) — 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, Chair 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 three-quarter-point hikes before that. The Fed Chair’s remarks Tuesday raise the real possibility that the Fed will reverse course and hike rates by a half-percentage point at its next meeting March 21-22.

The Fed chair’s warning of potentially more aggressive moves led some economists to pencil in higher rates for later this year than they had previously estimated. It also darkened the mood on Wall Street, where stock prices tumbled in the hours after Powell began speaking. In mid-day trading, the broad S&P 500 index was down a sizable 1.6%.

At their forthcoming meeting, Fed officials will also issue updated forecasts for how high they expect their benchmark rate to ultimately reach.

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.

During Tuesday’s hearing, 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.

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.

“I don’t think fiscal policy right now is a big factor driving inflation,” Powell responded.