The Federal Reserve Chairman, Jerome Powell, has warned that interest rates will likely be higher than central bank policymakers had expected. In prepared remarks for his appearances this week on Capitol Hill, Powell stated that the central bank would be prepared to increase the pace of rate hikes if the data indicated that faster tightening was warranted.
Inflation Reversal Leads to Tighter Monetary Policy
Citing data from earlier this year that showed inflation has reversed the deceleration it showed in late 2022, Powell warned of tighter monetary policy ahead. The latest economic data has come in stronger than expected, suggesting that the ultimate interest rate level is likely to be higher than anticipated.
Implications of Powell's Remarks
Powell's remarks carry two implications: the peak level of the federal funds rate is likely to be higher than previously indicated by Fed officials, and the recent switch to a smaller quarter-percentage point increase could be short-lived if inflation data continues to run hot.
Monetary Policy to Stay Restrictive for Some Time
Powell noted that restoring price stability will likely require the Fed to maintain a restrictive stance on monetary policy for some time. He stated that the Fed would stay the course until the job was done and warned against prematurely loosening policy.
Rate Decisions Dependent on Data
Powell reiterated that rate decisions would be made meeting by meeting and would depend on the data and their impact on inflation and economic activity rather than following a preset course. The markets mostly expect the Fed to enact a second consecutive quarter-point rate increase later this month, but traders are pricing in a close to 30% probability of a higher half-point increase.