Federal Reserve Chairman Jerome Powell warned that “the final level of interest rates is likely to be higher than previously expected.” Also, if faster tightening is warranted, the Fed “would be willing to increase the pace of rate hikes,” Powell said.
Federal Reserve predicts higher interest rates, faster hikes
Federal Reserve Chairman Jerome Powell presented the Fed’s semiannual monetary policy report to the Senate Banking, Housing and Urban Affairs Committee on Tuesday and the House Financial Services Committee on Wednesday.
“My colleagues and I are fully aware that high inflation is causing significant difficulties, and we are strongly committed to returning inflation to our 2 percent target,” Powell said in identical remarks to both the Senate and House committees. He detailed:
Over the past year, we have taken decisive action to tighten the stance of monetary policy. We’ve come a long way and the full effect of our tightening is yet to be felt. However, we still have work to do.
“January’s data on employment, consumer spending, manufacturing output and inflation partially reversed the softening trends we saw in the data just a month ago,” Powell continued.
Citing inflation well above the Fed’s 2% target and an “extremely tight” labor market, he noted that the Federal Open Market Committee (FOMC) meeting has raised interest rates by 4-1/2 percentage points over the past year. “Broader, inflation has eased somewhat since the middle of last year, but remains well above the FOMC’s long-term target of 2%,” Powell described, noting:
We continue to expect that the current increases in the target range for the federal funds rate will be adequate to achieve a monetary policy stance that is sufficiently restrictive to bring inflation back to 2% over time.
While acknowledging that “inflation has been slowing in recent months,” the Federal Reserve chairman emphasized that “the process of returning inflation to 2% has a long way to go and is likely to be bumpy.”
Warning that restoring price stability would likely require the Fed to “maintain a restrictive monetary policy stance for some time,” Powell concluded:
Recent economic data has been stronger than expected, suggesting that the final level of interest rates is likely to be higher than previously expected. If the body of data suggests that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.
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