Federal Reserve Chairman Jerome Powell on Tuesday pledged to continue the battle against inflation, arguing that the U.S. economy “does not work for anyone” without stable prices.
Over the past two policy meetings, the Fed has slowed the pace of its interest rate increases from a 75 basis point hike in November to only 25 basis points in early February.
In testimony prepared for the Senate Banking Committee on Tuesday, Powell left the door open for accelerating the pace of monetary tightening if necessary.
“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,” Powell said.
Two Fed officials have disclosed that they had pushed for a 50 basis point hike at the February meeting. This has sparked speculation that the central bank could accelerate the pace of rate hikes at their next meeting on March 21-22.
Over the past few weeks, most Fed officials have said they want to see the employment and consumer price inflation reports for February before deciding how much to raise their policy interest rate at their March meeting.
In his testimony, Powell noted that a softening trend of inflation was reversed in January. There was little sign of disinflation in the key category of core services excluding housing, he added.
Some of this might have been caused by warmer weather, he said.
“Still, the breadth of the reversal along with revisions to the previous quarter
suggests that inflationary pressures are running higher than expected at the time of our previous meeting,” he said.
Overall, “the process of getting inflation back down to 2% has a long way to go and is likely to be bumpy,” Powell concluded.
Recent data on employment, consumer spending and manufacturing production also partly reversed the softening trends that had been seen late last year, the Fed chairman said.
The stronger-than-expected economic data “suggests that the ultimate level
of interest rates is likely to be higher than previously anticipated,” Powell said.
The final resting place for the Fed’s interest-rate target has been dubbed the “terminal rate” by investors. In December, Fed officials penciled in a 5.1% terminal rate for Fed funds with a “general tendency” band in a range of 5.1%-5.4%.
Fed officials will give new projections of the terminal rate at their March meeting.
Investors see the Fed hitting a terminal rate of 5.5%-5.75% in September after four straight 25 basis point moves.
Once the Fed gets to the terminal rate, Fed officials see the need to maintain a restrictive stance “for some time,” Powell said.
“The historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done,” Powell said.
The Fed has raised its benchmark fed funds rate by 4.5 percentage points over the past year. The full effects of the hikes have yet to be felt, especially on inflation, Powell said.
Powell told the Senators that Fed officials understand that their actions affect communities, families, and businesses across the country.
“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,” he said.
U.S. stocks
DJIA,
SPX,
were little changed ahead of Powell’s testimony. The yield on the 10-year Treasury note
TMUBMUSD10Y,
was just below 4%.
