The Federal Reserve will likely need to raise interest rates more than expected in response to recent strong data, Fed Chair Jerome Powell told U.S. lawmakers
Powell's remarks, indicating strongly that Fed officials will project a higher endpoint for the central bank's benchmark overnight interest rate at the upcoming March 21-22 meeting, sparked a quick repricing in bond markets as investors boosted bets to more than 70% that the Fed would approve a half-percentage-point rate hike at that meeting.
Equity markets fell and the U.S. dollar was trading higher. The March 10 release of the Labor Department's jobs report for February and an inflation report next week will be key data in shaping that outcome. The Fed's policy rate is currently in the 4.50%-4.75% range. As of December, officials saw that rate rising to a peak of around 5.1%, a level investors expect may move at least half a percentage point higher now. Powell's statement was "surprisingly hawkish," said Michael Brown, a market analyst with TraderX in London. With a 50-basis-point rate hike now in play, Brown said a strong monthly jobs report on Friday would likely lead to "calls for a 6% terminal rate," nearly a percentage point higher than Fed officials had projected as of December. Powell will testify again on Wednesday before the U.S. House of Representatives Financial Services Committee.The hearing and Powell's testimony honed in on an issue that is now at the center of the Fed's discussions as officials try to determine whether recent data will prove to be a "blip," or end up signaling that inflation remains stickier than thought and warrants a tougher response from the Fed. In his testimony, Powell noted that much of the impact of the central bank's monetary policy may still be in the pipeline, with the labor market still sustaining a 3.4% unemployment rate not seen since 1969, and strong wage gains. While Powell said he thought the Fed's 2% inflation target could still be met without dealing a major blow to the U.S. labor market, he acknowledged in his testimony and in responses to senators' questions that "there will very likely be some softening in labor market conditions." How much remains unclear, but Powell said the focus will remain more squarely on how inflation behaves. Inflation has fallen since Powell's last appearances before Congress. After topping out at an annual rate of 9.1% in June, the Consumer Price Index dropped to 6.4% in January; the separate Personal Consumption Expenditures price index, which the Fed uses as the basis for its 2% target, peaked at 7% in June and had fallen to 5.4% as of January."The process of getting inflation back down to 2% has a long way to go and is likely to be bumpy," Powell said, adding later in the hearing that "the social costs of failure are very, very high." Reporting by Howard Schneider; Additional reporting by Saqib Ahmed Editing by Dan Burns, Nick Zieminski and Paul SimaoCovers the U.S. Federal Reserve, monetary policy and the economy, a graduate of the University of Maryland and Johns Hopkins University with previous experience as a foreign correspondent, economics reporter and on the local staff of the Washington Post.
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