Fed Likely to Raise Rates Higher than Anticipated

Jennifer Schonberger |

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Federal Reserve Chair Jerome Powell told lawmakers on Tuesday interest rates are likely to rise more than previously expected as the central bank works to bring down inflation, which remains stubbornly above the central bank's 2% target. Investors began the year with optimism the Fed would stop its rate-hiking campaign as soon as February. Powell's comments Tuesday opened the door to the possibility of both a higher terminal federal funds rate, as well as a higher pace of increases. Powell's comments spurred traders to price in a higher chance of a 0.50% hike than a 0.25% increase later this month. The Fed will kick off its next two-day policy meeting in two weeks, with a policy announcement set for the afternoon of March 22. "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," Powell told the Senate Banking Committee in prepared remarks. "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." "Although inflation has been moderating in recent months, the process of getting inflation back down to 2 percent has a long way to go and is likely to be bumpy," Powell added. The latest Consumer Price Index report released last month showed prices rose 6.4% over the prior year in January, a slowdown from last summer's peak inflation rate of 9.1% but still well above the Fed's 2% target. The Fed projected at its December policy meeting interest rates would need to rise to a range of 5%-5.25% this year, though Powell's comments now suggest rates will need to eventually rise above this level. Following the Fed's February policy decision, the central bank's benchmark interest rate stands in a range of 4.5%-4.75%. Powell said in his prepared remarks that the Fed is "acutely aware" high inflation is causing "significant hardship" for Americans while also pledging to “stay the course until the job is done." He noted that economic data from January on inflation, job growth, consumer spending, and manufacturing production have partly reversed course from the slowdown seen back in December, and cautioned that the "breadth of the reversal" suggests inflation is running higher than expected. He reiterated the Fed still needs to see a drop in services inflation excluding housing to bring inflation down, which is likely to require a weaker job market.