Jay Powell warns the Fed not to start raising interest rates again

Jay Powell, in a speech prepared for a high-level congressional appearance on Tuesday, has warned that the Federal Reserve stands ready to return to bigger rate hikes if the US economy continues to grow too fast.

Powell’s statement marks the Fed Chair’s first public intervention since data releases showed the central bank is still struggling to cool the US economy despite a year-long campaign to tighten monetary policy.

Powell describes the latest economic data as “stronger than expected” and will tell the Senate Banking Committee that “final interest rate levels will likely be higher than previously thought.”

“If the body of data suggested that faster tightening was warranted, we would be willing to increase the pace of rate hikes,” he adds.

The dollar appreciated and US Treasury yields rose after Powell’s comments were released.

Traders increased their bets on a half-percentage-point rise in interest rates at the next Fed meeting later this month, but markets still viewed a quarter-percent hike as a more likely outcome.

Powell’s comments come after the Federal Reserve spent months trimming the magnitude of rate hikes from a peak of 0.75 percentage point that lasted from June through November. It flattened out to a half-point hike in December, then reverted back to the more traditional quarter-point hike in February.

The Fed’s interest rate is within a target range of 4.5 percent to 4.75 percent, compared to near zero this time last year. In December, Fed officials forecast interest rates would peak at 5.1 percent this year.

But the Fed chair’s comments are the latest indication that he is poised to accelerate the pace of rate hikes amid longer-than-expected price pressures.

Two key data releases, due before the next meeting, will help support the Fed’s decision: the next monthly jobs report on Friday and the February CPI report due next week.

Investors and economists will be watching to see if the rebound in jobs and consumer demand last January held up. Powell said the hot data “likely reflects unseasonably warm weather.”

Politically, Powell is likely to face renewed pressure from Republicans to be aggressive and not fall behind the curve in tackling inflation. But Democrats are increasingly concerned that the Fed could go too far in tightening monetary policy and trigger a recession that could erode many of the labor market gains made during the recovery from the pandemic.

On Tuesday, Powell said that bringing inflation back to the Fed’s 2 percent target would require “very likely” “some softening in labor market conditions,” hinting at upcoming job losses.

The US currency was up 0.6 percent against the euro the day after his comments were published. This compared to an increase of 0.4 percent previously. The yield on interest-sensitive two-year Treasuries rose 0.07 percentage points to 4.964 percent.

Powell is also expected to face questions about banking regulation, with Democrats urging the Fed to tighten capital standards for the largest institutions and Republicans calling for looser treatment. Michael Barr, vice chairman of the Fed, is leading a review of capital rules.

Additional reporting by Tommy Stubbington