Powell Warns MORE Rate Hikes to Drive Inflation Down to 2% Target

The Dow Jones fell more than 500 points after Federal Reserve Chair Jerome Powell told legislators on Tuesday that interest rates will likely have to be raised more than anticipated as the central bank seeks to reduce inflation. Inflation is stubbornly over the central bank's 2% target.

Jerome Powell, the Chairman of the Federal Reserve, told the Senate Banking Committee in prepared remarks….

"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."

"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."

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 most recent employment report was red-hot, and another one is coming out in just three days on March 10, 2023, which might reveal an economy that is once again booming but still has over 8 million empty job vacancies.

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Powell's comments are leading traders to price in more of a chance that interest rates could be hiked by ½ point instead of the ¼ point that had been expected, according to data from CME Group.

Morgan Stanley's chief U.S. economist Ellen Zentner issued a note to the firm's clients saying that Powell's remarks "opened the door" to a return of 0.50% hikes…

 "If the incoming data flow warrants it." If there are "upside surprises" in a job, report this Friday from the Labor Department that could "drive a faster and longer tightening cycle."

At its December policy meeting, the Fed projected that 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 rise above this level eventually. Following the Fed's February policy decision, the central bank's benchmark interest rate stands in a range of 4.5%-4.75%.

It now appears interest rates may have to rise to 6% or more to cool inflation to the Federal Reserve's 2% target. At such a high rate, a soft landing isn't likely. Instead, the U.S. economy could suffer a painful contraction, i.e., recession.

During Tuesday's hearing, Senate Banking Committee Chair Sherrod Brown (D-OH) pressed Powell, warning that rate hikes could lead to job losses and pointing out that there are other ways to bring down prices, citing the strengthening of supply chains, boosting US manufacturing, and rebuilding infrastructure.

Democratic Senator Elizabeth Warren predicted that if the Fed increases rates as anticipated, to 5%-5.25%, excluding any further rate rises Powell has recently proposed beyond that level; unemployment would climb to 4.6%. She argued that it would result in the layoff of two million workers. Warren approached the Chairman of the Federal Reserve...

"Chair Powell, if you could speak directly to the two million hardworking people who have decent jobs; today, whom you're planning to get fired over the next year, what would you say to them?"

Powell's response…

"I would explain to people more broadly that inflation is extremely high, and it's hurting the working people of this country badly. All of them, not just two million of them, but all of them are suffering under the high inflation, and we are taking the only measures we have to bring inflation down."

Chairman Powell acknowledged 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."

The Fed chair said Tuesday that policymakers would continue to make decisions on a meeting-by-meeting basis.

Powell noted that strength in the economic data shown in January on inflation, job growth, consumer spending, and manufacturing production had forced the Federal Reserve to reverse course from the slowdown in December.

Powell attributed some of the softening to unseasonably warm weather in January but cautioned that the "breadth of the reversal" suggests inflation is running higher than expected. He reiterated that 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.

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                       Fed Chair Jerome Powell says interest rates are 'likely to go higher' than anticipated