The United States is ready to accelerate interest rate hikes — and could raise them higher than expected — if necessary to bring down inflation and a strong labor market, Federal Reserve Chairman Jerome Powell said Tuesday.
An “unseasonably warm” January across much of the country likely contributed to robust employment, consumer spending, manufacturing and inflation that indicated a partial reversal of earlier easing trends, Powell told the Senate Banking Committee.
“If the backbone of the data indicated the need for faster tightening, we would be ready to increase the pace of rate hikes,” he said.
He added that “the final level of interest rates” is also likely to be higher than previously thought.
Shares fell sharply after Powell’s comments, with the Dow Jones Industrial Average closing 1.7% lower.
The dollar strengthened sharply against the euro and other major currencies, and the yield on two-year US Treasury bonds exceeded 5 percent.
Chance for a bigger lift
The US central bank has raised its benchmark interest rate eight times since the beginning of last year as it fights inflation that remains stubbornly above its long-term target of 2 percent.
Last month, he raised rates by a quarter of a percentage point to 4.50 percent to 4.75 percent, the highest level since the global financial crisis.
Powell’s comments raise the likelihood of a 50 basis point Fed rate hike at its next meeting this month, Evercore ISI economists Krishna Guha and Peter Williams wrote in a note to investors.
“We have to admit that this option seems a bit more realistic than we previously thought,” they said, although they added that a quarter-point increase was still the more likely option.
According to Convera senior market analyst Joe Manimbo, the markets are now roughly evenly split on the chances of a larger half-point rate hike.
Despite its strong moves, the Fed’s favorite measure of inflation, the Personal Consumption Expenditure Price Index (PCE), edged up slightly, hitting an annualized 5.4 percent in January.
PCE core inflation, which excludes energy and food price volatility, also rose 4.7 percent.
At the same time, the job market remains “extremely tight” with about two jobs available for every unemployed person in December, Powell said.
In January, the number of jobs in the US rose sharply: employers created more than half a million new jobs and brought the unemployment rate to its lowest level since the 1960s.
A strong labor market supports incomes and, in turn, demand.
“In order to restore price stability, we will need to see lower inflation in this sector, and there will most likely be some easing in labor market conditions,” Powell said.
Pressure on the debt ceiling
At Tuesday’s hearing, Powell also faced questions about ongoing negotiations between the Biden administration and congressional Republicans to raise the debt ceiling.
“Whatever happens, Congress really needs to raise the debt ceiling,” he said, adding calls for both sides to come to an agreement.
In January, the United States reached its $31.4 trillion borrowing limit, setting off a feverish negotiation between Congress and the White House to raise the limit and allow the US to meet pre-existing spending commitments.
Republicans in Congress have demanded spending cuts in exchange for their support, while the Biden administration has said it wants to separate any upcoming budget talks from the debt-limit vote.
The nonpartisan Congressional Budget Office warned last month that the country risks defaulting on its debt as early as July if no deal is reached.
Powell’s appearance came shortly after the US central bank released its semi-annual monetary policy report, which pointed to tight labor markets, solid job growth, historically low unemployment and elevated nominal wage growth.
“The process of bringing inflation down to 2 percent has a long way to go and is likely to be bumpy,” Powell said.
“We will stay the course until the job is done.”