US Fed prepared to speed up rate rises: Powell

Given recent strong US economic data, “the ultimate level of interest rates is likely to be higher than previously anticipated,” Fed Reserve chair Jerome Powell says.

US Fed Reserve chair Jerome Powell’s comments on the rates outlook triggered falls on Wall Street. Picture: Win McNamee/AFP

US Federal Reserve chair Jerome Powell has opened the door to a larger half-point interest-rate increase this month and said officials are likely to lift rates higher than they previously expected to combat inflation in a stronger economy.

Mr Powell’s comments overnight – during the first of two days of Congress hearings – offered his first public acknowledgment that data showing hotter inflation and hiring could lead Fed officials to alter their recent strategy of raising rates in smaller quarter-point increments.

“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,” Mr Powell told 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.”

Fed officials raised the benchmark federal-funds rate by a quarter point to a range between 4.5 per cent and 4.75 per cent last month.

That slowed the pace of rate rises following increases of a larger half-point in December and 0.75-point in November to allow them to better assess the effects of last year’s rapid increases.

In December, most of them thought they would raise the rate this year to between 5 per cent and 5.5 per cent and hold it there into 2024. They will submit new projections at their March 21-22 meeting.

Stocks on Wall Street saw another forgettable day Picture: Spencer Platt/AFP

In making their next rate decision, Mr Powell suggested officials would pay close attention to Friday’s government report on February hiring and next week’s report on inflation.

Since they last met on February 1, several economic reports have revealed hiring, spending and inflation were stronger in January than expected, and data revisions showed inflation and labour demand didn’t soften as much as initially reported late last year.

“We’re looking at a reversal, really, of what we thought we were seeing to some extent,” said Mr Powell.

Last month, he had stressed the importance of moving more slowly to ensure the Fed didn’t raise rates too much.

On Tuesday, he said, “nothing about the data suggests to me that we’ve tightened too much.” Some of the recent upswing could reflect unusually warm January weather that can interfere with seasonal adjustments to economic data, he said.

But the breadth of the reversal, together with revisions to previous data, “suggests that inflationary pressures are running higher than expected at the time of our previous [rate-setting] meeting,” Mr Powell said.

The Fed has been trying to curb investment, spending and hiring by raising rates, which makes it more expensive to borrow and can push down the price of assets such as stocks and real estate.

The fed-funds rate influences other borrowing costs throughout the economy.

Tuesday’s hearing marked Mr Powell’s first appearance before Congress since last June, when the Fed had lifted the fed-funds rate to a range between 1.5 per cent and 1.75 per cent.

Most politicians on both sides of the aisle complimented Mr Powell on how interest rates have been managed over the past year, or they offered only mild criticism.

But senator Elizabeth Warren challenged him over fears the Fed’s efforts to rein in inflation would lead to significantly higher job losses than central bank officials have said is likely. During a testy exchange, Ms Warren repeatedly pressed Mr Powell to address an estimated 2 million workers who might lose their jobs as the Fed tries to slow the economy.

After several questions, Mr Powell responded, “Will working people be better off if we just walk away from our jobs and inflation remains 5 per cent-6 per cent?”

Mr Powell is set to return to Capitol Hill for a second day of hearings before a House committee.

Those will be his last scheduled public remarks on interest-rate policy, and a final chance to shape market expectations, before the Fed’s next meeting. Officials begin their pre-meeting quiet period on Saturday.

Several Fed officials have indicated in recent weeks they could raise rates this year more than previously projected.

Three regional Fed bank presidents have said they could have backed a larger half-point increase last month or would do so at the coming meeting.

Employers added 517,000 jobs in January, a figure that shocked economists who were anticipating hiring to slow, while the unemployment rate declined to 3.4 per cent, a 53-year low. This week’s labour report could offer clues on whether the gain was a blip or a sign of an economy that is accelerating.

– The Wall Street Journal