Federal Reserve Chairman Jerome Powell on Tuesday delivered new warnings about inflation and the debt limit.
In semiannual testimony before the Senate Banking Committee, Powell signaled that sharper interest rate hikes could lie ahead as the Fed looks to fight inflation that remains above its target level.
“Although inflation has been moderating in recent months, the process of getting inflation back down to 2% has a long way to go and is likely to be bumpy,” Powell said. “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. Restoring price stability will likely require that we maintain a restrictive stance of monetary policy for some time.”
Powell also warned lawmakers that, though the Fed does not play a role in the matter, they must raise the federal debt limit to avoid widespread economic pain. “Congress really needs to raise the debt ceiling — that’s the only way out,” he said. “If we fail to do so, I think that the consequences are hard to estimate, but they could be extraordinarily adverse and could do long-standing harm.”
What’s next: After racing to raise rates by a total of 4.25 percentage points over the course of 2022, the bank in February eased up a bit, lifting its benchmark rate by just 25 basis points. Now the Fed may feel the need to pick up the pace again. The Fed’s rate-setting committee will meet again on March 21 and 22, and while it will have a new economic data — including another inflation report, due out next week — to help guide its policy, markets increasingly expect the bank will again raise its key interest rate by half a percentage point.
“If the Fed did scale back up to a half-point hike, central bankers would be going against many of their messages from the past few months,” Rachel Siegel writes at The Washington Post. “Officials have argued that smaller, quarter-point increases give them more flexibility as they tiptoe up to the federal funds rate’s ultimate level. Rate hikes also operate with long lags, and policymakers have warned about the risks of going too far, too fast, especially since the Fed has the dual responsibility of controlling prices and also supporting the labor market.”
The bottom line: Analysts warn that the easiest part of the inflation fight may be behind us and that price increases could prove stubbornly sticky as the Fed tries to guide them back to a 2% annual rate. Powell’s hawkish turn Tuesday was meant to reinforce the Fed’s message that it won’t pull back too soon. “I think nothing about the data suggests to me we’ve tightened too much,” Powell said. “Indeed, it suggests we still have work to do.”