Fed Chair Powell Signals Likely Higher Interest Rates, Markets Wary
Federal Reserve Chairman Jerome Powell warned Congress on Tuesday that the central bank may need to raise interest rates higher than previously anticipated in order to bring down stubborn inflation. The Dow Jones Industrial Average tumbled 1.7% in reaction to Powell’s remarks.
Powell, who is appearing before the Senate Banking Committee as part of his semiannual testimony on monetary policy, said 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 Fed has already raised rates 4.5% over the past year in an effort to bring down inflation, which currently stands at 6.4%. However, the battle is not yet won, and Powell has cautioned that disinflation will be bumpy and there’s a long “ways to go.”
The Federal Reserve is set to meet later this month to consider policy changes, including their next rate hike. At the beginning of this year, the rate of increase was slowed down from a 0.5 point increase in December to a 0.25 point increase at the start of 2023.
The markets are anxious over whether the central bank can pull it off. They express concern that the Federal Reserve might be too aggressive, yet they also wish for it to reduce inflation. Inflation should be curbed by increasing rates. The Federal Reserve's decisions, however, may lead to a recession and an increase in unemployment.
Powell said the Fed will “stay the course until the job is done” and that “Congress really needs to raise the debt ceiling. That’s the only way out in a timely way that allows us to pay all of our bills.”
The futures market now prices a 50 basis-point hike to the federal funds rate as the most likely outcome following the Fed’s March 22 meeting. Some traders have reexamined their rate hike expectations for the year, with a growing number of investors now betting that the Fed could raise rates higher than previously projected.
The central bank must also consider the risks of going too far, too fast. The exceptionally large seasonal adjustment factors and abnormally warm temperatures in January, which was the sixth warmest in recorded US history, certainly had a positive effect on short-term activity and inflation. This influence, however, is likely to dissipate in the months to come.
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