Fed Chair Powell: Rate Hikes Will Go 'Higher Than Previously Anticipated’

Caught off guard by stubborn inflation, the Federal Reserve is likely to raise interest rates higher than officials had previously expected. 

Inflation has resisted the Fed’s efforts to tame it, and central bank officials will have to raise benchmark interest rates higher than previously forecast, Fed chair Jerome Powell told the Senate’s banking committee at a hearing Tuesday. The Fed had been leaning toward winding down hikes as recently as February, but Powell kept the door open to re-accelerating increases. He testified that to fully quell inflation, the central bank would have to keep rates high “for some time.”

“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be to be higher than previously anticipated,” Powell said. “If the totality of the data were to indicate that faster tightening is warranted, we'd be prepared to increase the pace of rate hikes.”

Powell’s comments underscored how much policymakers at the central bank have changed their outlook based on February’s economic data. Those reports showed inflation, the job market, and consumer spending all staying hot, despite the Fed’s efforts over the last year to cool them down with rate hikes. 

A higher fed funds rate influences borrowing costs for many kinds of loans, raising the price people pay on consumer debt like credit cards and car loans and, indirectly, mortgage rates. Stocks fell Tuesday as Powell testified, with the Dow Jones Industrial Average, the S&P 500 index, and the tech-heavy NASDAQ Composite all slumping.

Higher borrowing costs also put businesses under pressure, making it harder to invest in new equipment and pay workers. The Fed’s goal is to slow the economy, reduce wage increases,  and allow supply and demand to rebalance—potentially at the cost of increased unemployment or even a recession. 

Almost a year into the Fed’s campaign of anti-inflation rate hikes, the fed’s benchmark rate has risen to a range of 4.5% to 4.75%, its highest since 2007, from near zero. 

In the wake of Powell’s testimony, traders raised their expectations for how high the Fed will raise rates, anticipating hikes equal to another full percentage point before the end of the year, according to CME’s Fedwatch tool, which forecasts Fed rate hikes based on trading data. Traders are now betting that the Fed will hike interest rates a half-point when they meet in March, versus the quarter-point hike that had been forecast on Monday.

Powell faced pushback from Democrats who questioned whether rate hikes—the central bank’s main tool for controlling inflation—were the right way to tackle price increases. 

Senator Sherrod Brown of Ohio blamed inflation on corporate greed rather than worker pay, noting that companies have raised prices while boasting of record profits, putting the money towards extravagant CEO pay and stock buybacks benefiting shareholders. 

“Cooling the economy means laying off workers. Lowering demand means workers get fewer raises,” Brown said. “There are other ways we can bring prices down instead of lowering demand—again, making people poorer, laying people off, and denying worker raises.”

Brown’s criticism was echoed by Senator Elizabeth Warren, a progressive Democrat from Massachusetts. Warren sparred with Powell over the Fed’s own projections that taming inflation through rate hikes will cause the unemployment rate to rise from its current level of 3.4%—its lowest in more than 50 years—to 4.6%. That would mean 2 million more people would be out of work.

“If you could speak directly to the 2 million hard-working people who have decent jobs today, who you're planning to get fired over the next year, what would you say to them? How would you explain your view that they need to lose their jobs?” Warren said.

“I would explain to people more broadly that inflation is extremely high and it's hurting the working people of this country badly,” Powell said. “All of them, not just 2 million of them, but all of them, are suffering under high inflation and we are taking the only measures we have to bring inflation down.”

Powell’s comments show the Fed’s policy is likely to take a more aggressive turn. Hawkish behavior will increase the chances that the economy will experience a hard landing—that is, a serious economic slowdown, James Knightley, chief international economist at ING, wrote in a commentary.