Fed Chair Warns of Higher Interest Rates Than Previously Anticipated, Faster Hikes

Federal Reserve Chairman Jerome Powell has warned that “the ultimate level of interest rates is likely to be higher than previously anticipated.” In addition, if faster tightening is warranted, the Fed “would be prepared to increase the pace of rate hikes,” Powell said.

Federal Reserve Chairman Jerome Powell presented the Fed’s semiannual Monetary Policy Report to the Senate Committee on Banking, Housing, and Urban Affairs on Tuesday and the House Committee on Financial Services on Wednesday.

“My colleagues and I are acutely aware that high inflation is causing significant hardship, and we are strongly committed to returning inflation to our 2% goal,” Powell said in his identical remarks to both the Senate and House committees. He detailed:

Over the past year, we have taken forceful actions to tighten the stance of monetary policy. We have covered a lot of ground, and the full effects of our tightening so far are yet to be felt. Even so, we have more work to do.

“The data from January on employment, consumer spending, manufacturing production, and inflation have partly reversed the softening trends that we had seen in the data just a month ago,” Powell continued.

Citing inflation well above the Fed’s 2% goal and an “extremely tight” labor market, he noted the Federal Open Market Committee (FOMC) meeting raised interest rates by 4-1/2 percentage points over the past year. “From a broader perspective, inflation has moderated somewhat since the middle of last year but remains well above the FOMC’s longer-run objective of 2%,” Powell described, emphasizing:

We continue to anticipate that ongoing increases in the target range for the federal funds rate will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.

While acknowledging that “inflation has been moderating in recent months,” the Federal Reserve chairman stressed that “the process of getting inflation back down to 2% has a long way to go and is likely to be bumpy.”

Cautioning that restoring price stability will likely require the Fed to “maintain a restrictive stance of monetary policy for some time,” Powell concluded:

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. 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.

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