The head of the Federal Reserve, Jerome Powell, made it plain on Tuesday that the institution is ready to respond to recent economic strength by boosting interest rates more than anticipated and, if recent data stays strong, maybe reverting to a faster pace of rate hikes.
The Senate Banking Committee heard his remarks, which were the clearest acknowledgement to date that recent figures indicating that US inflation is still persistently high and the employment market is still robust are likely to cause the Fed’s policy trajectory to change.
Last year, the Federal Reserve increased interest rates at the quickest rate since the 1980s, raising borrowing costs from almost zero to more than 4.5 percent. ye.commastmastmastmastmastmastmas, and. Yet according to a number of recent economic indicators, inflation did not go down as much as anticipated last year and continued to grow faster than projected in January, while other data indicated that hiring remained robust and consumer spending increased at the beginning of the year.
Although the favorable January weather may have contributed to some of that momentum by making construction and shopping excursions possible, Mr. Powell said the unanticipated strength would likely need a stronger policy response from the Fed.
He told the committee, “The most recent economic indicators have come in better than expected, which implies that the eventual level of interest rates is likely to be higher than previously anticipated.
In December, Fed officials predicted that rates would increase to a top of 5% to 5.25%, with a few penciling in a somewhat higher range of 5.25% to 5.55%. Without stating how much more would need to be added, Mr. Powell stated that the peak rate would need to be increased.
He even left the door open for quicker rate rises if the recent data, which includes a jobs report scheduled on Friday and a new inflation report due the following week, continues to be strong. In 2022, the Fed increased rates by three-quarters of a point many times, but it slowed to a half-point increase in December and a quarter-point increase in early February.
Mr. Powell said, “We would be prepared to accelerate the pace of rate rises if the totality of the evidence were to show that quicker tightening is merited.
Markets had been significantly gearing up for a quarter-point shift at the Fed meeting on March 21–22 before to his comments. Stock prices plunged after his opening remarks, investors increased their bets that the central bank would move by half a point in March, and a carefully monitored Wall Street recession indicator indicated a higher likelihood of a slump. The S&P 500 dropped by around 1.5% on Tuesday.
As the Fed increases interest rates, consumer spending on large credit-based items like homes and vehicles slows down, and it may deter firms from growing using borrowed funds. Wage growth slows down and unemployment may even increase as consumer spending and labor demand moderate, further reducing economic growth overall.
The labor market, however, has shown to be remarkably resilient to the Fed’s actions so far, with the lowest unemployment rate since 1969, swift hiring, and significant wage increases.
On Tuesday, several senators questioned the Fed chair about the effects that the central bank’s changes in policy will have on the job market.
Senator Elizabeth Warren, a Democrat, said that the Fed was attempting to “kick people out of work” and that if unemployment increased as much as central bankers anticipated, millions of people would lose their jobs.
More generally, I would convey to individuals that the nation’s working class is being severely harmed by the excessively high inflation rate. “We are reducing inflation using the minimal means we have at our disposal.”