Stronger-Than-Expected Economic Data
Powell stated that the recent economic data has been stronger than expected, indicating that the final level of interest rates may be higher than previously thought. While some of the strength may be attributed to seasonal factors, it suggests the Fed needs to take further measures to control inflation.
Prepared to Increase the Pace of Rate Hikes
If the incoming data suggests that faster tightening is necessary, Powell stated that the Fed would be prepared to increase the pace of rate hikes, potentially even returning to larger rate increases.
Powell's comments come after inflation unexpectedly jumped in January and represented a recognition that the disinflationary process is not proceeding smoothly. Senators asked various questions, including whether the Fed correctly diagnosed the inflation problem and if price pressures could be controlled without damaging economic growth and employment.
Democrats on the committee focused on the role of high corporate profits in persistent inflation, while Republicans focused on energy policy and federal spending. Powell agreed with various points made by both parties.
"Surprisingly Hawkish" Remarks Spark Reactions
Powell's remarks indicating that Fed officials will likely project a higher endpoint for the benchmark overnight interest rate at the upcoming March 21-22 meeting caused a quick repricing in bond markets. They led to increased bets for a half-percentage-point rate hike. Equity markets fell, and the U.S. dollar rose.
Key Data to Shape Outcome
The March 10 release of the Labor Department's jobs report for February and an inflation report next week will be crucial in shaping the outcome. The Fed's policy rate is currently in the 4.50%-4.75% range, projected to rise to a peak of around 5.1% as of December, but may increase by at least half a percentage point.