Federal Reserve Chairman Jerome Powell testified before Congress on Tuesday (7th) that the U.S. central bank will be prepared to accelerate the pace of interest rate hikes if economic data continues to be strong, pushing up borrowing costs to previously expected levels.
“The latest economic data was stronger than expected, suggesting that the final level of interest rates may be higher than previously thought,” Powell said in prepared remarks for a Senate Banking Committee hearing.
Powell also said: “Although inflation has been slowing in recent months, the process of bringing inflation down to 2% is still a long way off and may be bumpy. The latest economic data was stronger than expected, This suggests that the final level of interest rates may be higher than previously expected. If all the data indicate that faster tightening is warranted, we will accelerate the pace of rate hikes.”
Powell said that while some of the unexpected economic strength could be due to warmer weather and other seasonal effects, the Fed is mindful that it could also be a sign that the central bank needs to do more to curb inflation and possibly even return to inflation. Officials had planned for even larger rate hikes.
Inflation in core services unabated, job market tight
When commenting on the current economic situation and outlook, Powell pointed out that since his last testimony in the House of Representatives in the middle of last year, the growth of US inflation has moderated to some extent, but the inflation rate is still far above the Fed’s long-term target of 2%. Inflation in the core commodities sector has fallen as supply chain bottlenecks ease and monetary tightening limits demand. However, inflation in core services other than housing has not declined.
“So far, there has been little sign of a reduction in core inflation excluding housing, which accounts for more than half of core consumer spending. We need to see lower inflation in this area in order to restore price stability,” he said. And there’s a good chance that labor market conditions will soften.”
In terms of the job market, Powell pointed out in his testimony that most of the impact of the Fed’s monetary policy may still be brewing, the job market remains at a 3.4% unemployment rate not seen since 1969, and wage growth is strong. He thinks the labor market may have to weaken for broad services sector inflation to fall.
Bloomberg economists Anna Wong and Stuart Paul said terminal rates could shift higher for a longer period of time.
Market Reaction
After Powell’s testimony came out, the major US stock indexes fell in response, and the US Treasury yield approached the 4% mark again.dollar indexStraight up.
before the deadline,Dow Jones Industrial AverageDropped nearly 400 points or 1.2%, tentatively reported at 33,037.00;NasdaqThe index fell more than 80 points or nearly 0.7%, temporarily reported at 11,595.43;S&P 500 IndexDropped more than 40 points or 1.05%, tentatively reported at 4,005.85;Philadelphia SemiconductorThe index fell 0.3%, provisionally at 2,985.68. The U.S. 10-year bond rate rose to 3.964%;dollar indexUp 105.355.
According to the CME Group FedWatch Tool, the market estimates that the probability of the Fed raising interest rates by 1 yard (50 basis points) at the March meeting is 36.9%, and the probability of raising interest rates by 2 yards (50 basis points) is 63.1%; the terminal interest rate falls at 5.5% to 5.75% range.
