Powell signals increased rate hikes if economy stays strong

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 quarterpoint, 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. Over the past year, the central bank has raised its key rate, which affects many consumer and business loans, eight times.

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%.

“The presumption that's been established 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.