The US is prepared to speed up interest rate hikes — and could raise them higher than anticipated — if needed to cool inflation and a strong jobs market, Federal Reserve Chair Jerome Powell said on Tuesday.
An “unseasonably warm” January across much of the country was likely behind the robust employment, consumer spending, manufacturing and inflation figures, which pointed to a partial reversal of earlier softening trends, Powell told the US Senate Committee on Banking, Housing and Urban Affairs.
“If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,” he said.
Photo: EPA-EFE
He added that the “ultimate level of interest rates” is likely to be higher than previously anticipated.
All three main indices on Wall Street closed deep in the red, and most of Asia followed suit, following Powell’s comments.
Hong Kong shed more than 2 percent, while Shanghai, Sydney, Seoul, Singapore, Taipei, Mumbai, Bangkok, Wellington and Jakarta were also well down.
However, Tokyo ended slightly higher, as exporters won support from a weaker yen.
The Japanese unit on Tuesday tumbled against the US dollar, along with other major currencies in the wake of Powell’s testimony.
The US central bank has already raised its benchmark lending rate eight times since early last year, as it contends with inflation that remains stubbornly above its long-term target of 2 percent.
It raised rates last month by a quarter percentage point to 4.50 to 4.75 percent, its highest level since the global financial crisis.
Powell’s comments raise the likelihood of the Fed lifting rates by 50 basis points at its next meeting this month, Evercore ISI economists Krishna Guha and Peter Williams wrote in a note to investors.
“We must accept that this option appears to be somewhat more live than we had previously believed,” they said, though adding that a quarter-point hike was still the more likely option.
Markets are now roughly evenly split on the chances of a larger half-point rate hike, Convera USA LLC senior market analyst Joe Manimbo said.
Despite its forceful moves, the Fed’s favored inflation measure, the personal consumption expenditures (PCE) price index, rose slightly to an annual rate of 5.4 percent in January.
Core PCE inflation, which excludes volatile energy and food prices, also rose 4.7 percent.
At the same time, the labor market remains “extremely tight,” with close to two jobs available for every one unemployed person in December last year, Powell said.
US job creation surged in January, with employers creating more than half a million new jobs and driving the unemployment rate to its lowest level since the 1960s.
A strong labor market supports incomes and, in turn, demand.
“To restore price stability, we will need to see lower inflation in this sector, and there will very likely be some softening in labor market conditions,” Powell said.
At Tuesday’s hearing, Powell also faced questions about ongoing negotiations between US President Joe Biden’s administration and Republicans in the US Congress over raising the debt ceiling.
“Whatever else may happen Congress really needs to raise the debt ceiling,” Powell said, adding to calls for the two sides to come to an agreement.
Powell’s appearance comes shortly after the US central bank released a semiannual report on monetary policy, which pointed to a tight labor market, robust job gains, historically low unemployment and elevated nominal wage growth.
“The process of getting inflation back down to 2 percent has a long way to go and is likely to be bumpy,” Powell said. “We will stay the course until the job is done.”
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