Fed Chair Powell Signals Higher Rates Amidst Inflation and Recession Fears
By Federal Reserve Chairman Jerome Powell testified before the House Financial Services Committee Wednesday amid lingering inflation and recession fears.[0] He noted that 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. The Federal Reserve could raise interest rates quicker than they have already announced.[1]
By the end of 2021, the Federal Reserve estimated that it would only be necessary to increase rates to 3.1% in order to keep inflation in check.[2] The most recent prediction suggests interest rates will be at 5.1%, however, Powell declared on Tuesday that they are likely to be “higher than previously expected.” Experts are growing increasingly concerned that the recent hikes in prices, which are meant to reduce inflation by reducing consumer demand, could potentially lead to a worldwide recession, as both the housing and stock markets have already begun to suffer.[2]
The Federal Reserve has increased interest rates by 4.5% in the last twelve months.[3] Odds of a 50-basis-point hike on March 22 spiked to 48% from 30% before Powell's testimony.[4] If the inflation numbers are more definitive and the jobs report is strong, the Federal Reserve may opt to make a cut of 0.5%.[4]
Powell cautioned legislators that the U.S. debt ceiling must be raised, emphasizing that the Federal Reserve does not possess the means to avert or reduce the devastating economic effects of a historic U.S. debt default.[5] Powell cautioned that the Federal Reserve cannot shield the economy from the repercussions of the government not settling its financial obligations, nor avert a debt default.[6]
At the hearing, Democrats cautioned that too-rapid rate hikes may result in a recession that would have a disproportionate impact on lower-income Americans.[7]
Last month's higher-than-anticipated inflation rate caused Goldman Sachs and Bank of America analysts to increase their predictions of rate hikes, though the exact timing of the Federal Reserve's final rate raise is yet to be determined.[8] The central bank is anticipated to increase rates to a maximum of 5.5%, which would be the highest rate since the beginning of the 2000s.[8]
John Lynch, chief investment officer for Comerica Wealth Management, said investors should start taking “higher for longer” interest rates seriously – and include quality investments in their portfolios, like those found in profitable small-cap stocks.[9]
0. “Watch live: Fed chairman Powell testifies before House panel” The Hill, 8 Mar. 2023, https://thehill.com/homenews/3889513-watch-live-fed-chairman-powell-testifies-before-house-panel
1. “Full Steam Ahead for Jerome Powell – WSJ” The Wall Street Journal, 7 Mar. 2023, https://www.wsj.com/articles/jerome-powell-capitol-hill-federal-reserve-inflation-markets-5da4d66
2. “How High Will Fed Raise Rates? Powell Fuels Fears That Rates Could Hit 6%” Forbes, 8 Mar. 2023, https://www.forbes.com/sites/jonathanponciano/2023/03/08/how-high-will-fed-raise-rates-powell-fuels-fears-rates-could-hit-6
3. “US interest rates could go higher than expected” BBC, 7 Mar. 2023, https://www.bbc.com/news/business-64881469
4. “Fed Chair Powell Stokes Fear Of Half-Point Rate Hike; S&P 500 Falls” Investor's Business Daily, 7 Mar. 2023, https://www.investors.com/news/economy/fed-chair-powell-stokes-fear-of-half-point-rate-hike-sp-500-falls/
5. “Five takeaways from Powell’s House testimony” The Hill, 8 Mar. 2023, https://thehill.com/business/3890199-five-takeaways-from-powells-house-testimony/
6. “Powell leaves options open for Fed's March meeting: ‘We are not on a preset path'” Yahoo News, 8 Mar. 2023, https://news.yahoo.com/powell-leaves-options-open-for-feds-march-meeting-we-are-not-on-a-preset-path-213322847.html
7. “US debt default could cause ‘longstanding harm,' Fed Chair Jerome Powell says” ABC News, 7 Mar. 2023, https://abcnews.go.com/Politics/us-debt-default-cause-longstanding-harm-fed-chair/story?id=97665681
8. “Dow Falls Nearly 600 Points As Fed Chair Powell Warns More Severe Rate Hikes On Deck” Forbes, 8 Mar. 2023, https://www.forbes.com/sites/dereksaul/2023/03/07/dow-falls-nearly-600-points-as-fed-chair-powell-warns-more-severe-rate-hikes-on-deck
9. “Stock Market Today: Blue Chip Stocks Lead Market Lower After Powell Speech” Kiplinger's Personal Finance, 7 Mar. 2023, https://www.kiplinger.com/investing/stocks/stock-market-today-030723-blue-chip-stocks-lead-market-lower-after-powell-speech
