Federal Reserve Chairman Jerome Powell told lawmakers Tuesday that interest rates are likely to rise more than expected as the central bank works to reduce inflation, which remains stubbornly above the central bank’s target. Of 2%.
“The latest economic data has been stronger than expected, suggesting that the final level of interest rates is likely to be higher than anticipated,” Powell told the Senate Banking Committee in prepared remarks. “If the totality of the data indicates that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”
“Although inflation has been moderating in recent months, the process of bringing inflation down to 2 percent has a long way to go and is likely to be bumpy,” Powell added.
The latest Consumer Price Index report released last month showed prices rose 6.4% from a year earlier in January, a slowdown from last summer’s peak inflation rate of 9.1%, but still well above the Federal Reserve’s 2% target.
The Fed projected at its December policy meeting that interest rates would need to rise to a range of 5%-5.25% this year, although Powell’s comments now suggest rates will eventually need to rise above this level. Following the Fed’s February policy decision, the central bank’s benchmark interest rate is in a range of 4.5%-4.75%.
The Fed chair said on Tuesday that policymakers will continue to make decisions on a meeting-by-meeting basis, and while Powell acknowledged that the FOMC has slowed its pace of rate hikes, he did not mention whether or not rate hikes would continue at that pace.
Powell noted that January economic data on inflation, job growth, consumer spending and manufacturing output have partly reversed course from the slowdown seen in December.
Powell attributed some of the softening to unusually warm weather in January, but cautioned that the “breadth of the reversal” suggests inflation is running higher than expected. He reiterated that the Fed still needs to see inflation in services excluding housing fall to reduce inflation, which is likely to require a weaker labor market.
In questioning Tuesday, Senate Republicans are expected to focus in part on the Fed’s reassessment of bank capital requirements following a letter sent by Ranking Republican Tim Scott (R-SC) to the President Powell last week.
Senate Banking Chairman Sherrod Brown (D-OH) will warn against excessively raising interest rates in his opening statement, saying there are other ways to lower prices besides raising interest rates. Brown aims to strengthen supply chains, boost manufacturing in the US, and rebuild infrastructure.
While “there are times when the Fed must act…we cannot risk undermining one of the success stories of our current economy,” Brown said. “For the first time in decades, workers are finally, finally starting to have some power. Unemployment is at an all-time low of 3.4 percent. That’s not just a number. That means Americans have more opportunity and choice. , even in places where I haven’t seen much of it in recent years.”
Responding to lawmakers’ concerns, Powell said in prepared remarks that the Fed is “very aware” that high inflation is causing “significant hardship” for Americans.
Echoing his aggressive Jackson Hole speech in August, Powell said: “The historical record warns strongly against premature relaxation of policy. We will stay the course until the job is done.”
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