Fed Chairman Jerome Powell testifies during a hearing on Capitol Hill in Washington
par Howard Schneider et Lindsay Dunsmuir
WASHINGTON (Reuters) – The U.S. Federal Reserve (Fed) is likely to have to raise interest rates more than expected in the face of recent strong economic data and it is poised for even bigger moves if the “totality” of incoming information suggests that More restrictive measures are needed to control inflation, its chairman said on Tuesday.
“The latest economic data is stronger than expected, suggesting that the ultimate level of interest rates is likely to be higher than expected,” Jerome Powell said in remarks prepared for a hearing before the U.S. Senate Banking Committee.
These are the first public statements by Jerome Powell since inflation jumped unexpectedly in January and the US administration reported an unusually large increase in the number of salaried jobs during that month.
While some of this unexpected economic strength could be related to mild temperatures and other seasonal effects, Jerome Powell stressed that the Fed is aware that this could also be a sign that the US central bank needs to do more to curb inflation, perhaps even by returning to larger rate hikes than the quarter-point hike recently decided upon and which officials had planned to continue.
“If the data package were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,” said Jerome Powell.
The Fed will hold its next monetary policy meeting on March 21-22, while the monthly jobs report will be released on Friday and the inflation report next week. This data will be crucial in allowing policy makers to assess whether they are again falling behind the inflation curve or whether they can stick to more moderate policy as planned in their last meeting.
Whatever conclusion is reached, Jerome Powell’s new statements are a form of acknowledgment that the “process of disinflation” repeatedly referred to during his February 1 press conference may not be as obvious as expected.
Even though inflation “has slowed” since its peak last year, Jerome Powell said that “the process of bringing inflation down to 2% is far from complete and will likely be fraught with pitfalls”.
The Fed chairman will be questioned by members of the Senate Banking Committee after his testimony, with a similar hearing also scheduled for Wednesday before the House Financial Services Committee.
A POSSIBLE EASING OF THE JOB MARKET
Jerome Powell’s testimony echoes a subject now at the center of discussions within the central bank, its officials questioning whether the recent data is just a passing “anomaly”, as one of the president’s colleagues suggested. from the Fed, or whether they should be seen as evidence that the central bank needs to lean on the economy even more heavily than currently expected.
In his testimony, Jerome Powell indicated that much of the impact of central bank monetary policy had yet to show its effects, with the unemployment rate in the United States having fallen to 3.4%, unheard of since 1969, while wages are rising sharply.
Jerome Powell further hinted that the labor market may have to weaken for inflation to come down in the large service sector, which employs a lot of people and where prices continue to rise.
“To restore price stability, we will need to see lower inflation in this sector, and labor market conditions are very likely to ease,” he said.
On the markets, the Dow Jones fell by 0.88%, the Standard & Poor’s 500 by 1.01% and the Nasdaq by 0.77% around 4:15 p.m. GMT.
The dollar jumped 0.82% against a basket of benchmark currencies and the yield on two-year US Treasury bills, the most sensitive to changes in inflation, took six basis points, to 4.95 %.
(Reporting by Howard Schneider and Lindsay Dunsmuir; French version by Claude Chendjou, edited by Kate Entringer)
