Federal Reserve chairman Jerome Powell warned on Tuesday the central bank may have to push interest rates higher than previously expected in order to curb stubborn inflation.
The warning, in testimony before the Senate Banking Committee, comes after a series of economic indicators that indicate the economy is running hotter than expected despite aggressive action from the Fed.
“Although inflation has been moderating in recent months, the process of getting inflation back down to 2{17fd9ed690c1b52b81269a246981635feafa4e787b5d1af0bbeaebca7de63266} has a long way to go and is likely to be bumpy,” Powell told senators.
Over the last year, the central bank has raised interest rates eight times in an effort to tamp down demand. But after appearing to cool off late last year, both consumer spending and hiring came roaring back in January, putting more upward pressure on prices.
“Some of this reversal likely reflects the unseasonably warm weather in January,” Powell said.
But he added that Fed policymakers may have to raise interest rates more aggressively at their next meeting in two weeks if upcoming data shows similar strength. The U.S. will release February jobs data on Friday, which will be followed by the monthly inflation report next week.
Markets are hit hard by Powell’s comments
Investors had expected the Fed to raise rates by 0.25 percentage points at that meeting later this month. But odds of a larger, half-point increase rose sharply after Powell’s testimony.
Powell also suggested that interest rates may ultimately have to climb higher than the 5 to 5.5{17fd9ed690c1b52b81269a246981635feafa4e787b5d1af0bbeaebca7de63266} range that policymakers had predicted in December in order to bring prices under control. The Fed’s benchmark rate is currently 4.50 to 4.75{17fd9ed690c1b52b81269a246981635feafa4e787b5d1af0bbeaebca7de63266}.
The prospect of higher interest rates weighed on the stock market. The Dow Jones Industrial Average fell 575 points, or 1.7{17fd9ed690c1b52b81269a246981635feafa4e787b5d1af0bbeaebca7de63266}.
Higher rates should help curb inflation. But the Fed’s actions also risk sparking a recession and a rise in unemployment.
The debt ceiling fight also looms
Both Democrats and Republicans on the Senate Banking Committee tried to draw Powell into the looming fight over the federal debt ceiling.
Republicans are demanding the government rein in spending as a condition to raise the debt ceiling. Democrats accuse the GOP of risking a costly federal default if the debt ceiling is not raised and the government finds itself unable to pay its bills.
Powell avoided taking sides in the partisan wrangling.
“We do not seek to play a role in these policy issues,” he said. “But at the end of the day, there’s only one solution to this problem.”
“Congress really needs to raise the debt ceiling. That’s the only way out,” Powell said. “And if we fail to do so, I think that the consequences are hard to estimate, but they could be extraordinarily adverse, and could do longstanding harm.”
