Fed Chair Powell says interest rates are ‘likely to be higher’ than previously anticipated

Federal Reserve Chairman Jerome Powell on Tuesday cautioned that interest rates are likely to head higher than central bank policymakers had expected.

Citing data earlier this year showing that inflation has reversed the deceleration it showed in late 2022, the central bank leader warned of tighter monetary policy ahead to slow a growing economy.

“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” Powell said in remarks prepared for two appearances this week on Capitol Hill. “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”

Those remarks carry two implications: One, that the peak, or terminal, level of the federal funds rate is likely to be higher than the previous indication from the Fed officials, and, two, that the switch last month to a smaller quarter-percentage point increase could be short-lived if inflation data continues to run hot.

In their December estimate, officials pegged the terminal rate at 5.1%. Current market pricing moved higher following Powell’s remarks, to a range of 5.5%-5.75%, according to CME Group data. Powell did not specify how high he thinks rates ultimately will go.

The speech comes with markets generally optimistic that the central bank can tame inflation without running the economy into a ditch. Stocks fell sharply while Treasury yields jumped after Powell’s remarks were released.

January data shows that inflation as gauged by personal consumption expenditures prices — the preferred metric for policymakers — was still running at a 5.4% pace annually. That’s well above the Fed’s 2% long-run target and a shade past the December level.

Powell said the current trend shows that the Fed’s inflation-fighting job is not over, though he noted that some of the hot January inflation data could be the product of unseasonably warm weather.

“We have covered a lot of ground, and the full effects of our tightening so far are yet to be felt. Even so, we have more work to do,” he said, adding that the road there could be “bumpy.”

Powell speaks Tuesday before the Senate Banking, Housing and Urban Affairs Committee then will address the House Financial Services Committee on Wednesday.

The chairman faced some pushback from Democrats on the Senate panel who blamed inflation on corporate greed and price gouging and said the Fed should reconsider its rate hikes. Sen. Elizabeth Warren, D-Mass., a frequent Powell critic, charged that the Fed’s inflation goals will put 2 million people out of work.

“We’re taking the only measures we have to bring inflation down,” Powell said. “Will working people be better off if we just walk away from our jobs if inflation remains at 5, 6%?”

The Fed has raised its benchmark fund rate eight times over the past year to its current targeted level between 4.5%-4.75%. On its face, the funds rate sets what banks charge each other for overnight lending. But it feeds through to a multitude of other consumer debt products such as mortgages, auto loans and credit cards.

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