Fed set to raise rates further if economy stays hot

The Federal Reserve could increase the size of its interest rate hikes and raise borrowing costs to higher than expected levels if evidence continues to point to a robust economy and persistently high inflation, the president said. Jerome Powell in prepared testimony before a Senate panel.

“The latest economic data is stronger than expected, suggesting that the ultimate level of interest rates is likely to be higher than expected,” Powell said in testimony before the Senate Banking Committee. “If all the data were to indicate that faster tightening is warranted, we would be prepared to accelerate the pace of rate hikes.”

The Fed raises its key rate by a quarter of a point at the beginning of February after imposing a half-point hike in December and four three-quarter-point hikes previously. Over the past year, the central bank has raised its policy rate eight times, which affects many consumer and business loans.

Most economists and investors on Wall Street expected the Fed to make another quarter-point hike at its next meeting on March 21-22. But in recent days, traders have priced in a higher probability of a half-point rise, according to futures markets. Powell’s comments suggest a half-point increase in March is possible.

In his prepared remarks on Tuesday, Powell revisits some of the upbeat comments about lower inflation he made after the Feb. 1 Fed meeting, when he noted that “the disinflationary process has begun” and he has referred to “disinflation” – a broad and steady slowdown in inflation – several times. At that time, year-over-year consumer price growth had slowed for six consecutive months.

But after that meeting, the latest reading of the Fed’s preferred inflation measure showed consumer prices rose from December to January. at most in seven months. And reports on hiring, consumer spending and the economy in general also indicated that growth remains healthy.

Such economic numbers, Powell said on Tuesday, “have partly reversed the easing trends we saw in the data just a month ago.”

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