MNI: Powell-Fed Rate Peak Likely Higher; Could Quicken Hikes

Inflationary pressures appear to be running stronger than expected and the peak in the Federal Reserve's fed funds rate is likely to be higher than previously thought, Fed Chair Jerome Powell said Tuesday, leaving the door open to larger rate hikes if needed.

"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," he said in written testimony to Congress.

Powell also opened the door to potentially larger rate hikes. "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, also repeating that the Fed anticipates ongoing increases in the target range for the federal funds rate will be appropriate.

"We have covered a lot of ground, and the full effects of our tightening so far are yet to be felt. Even so, we have more work to do."

INFLATION RUNNING HIGHER

The Fed raised the fed funds rate by a quarter-percentage-point to a range between 4.5% and 4.75% last month, slowing the pace of rate rises following increases of a larger half-point in December and 0.75-point in November.

In December, most Fed officials thought they would raise the fed funds rate this year to between 5% and 5.5% and hold it there into 2024. Fed officials have said there is a risk interest rates will have to go higher than that, while some regional Fed bank presidents have said they could back a larger half-point increase at the next meeting.

(See: MNI INTERVIEW: Fed Could Hike Rates More Than Expected-Hoenig)

"The data from January on employment, consumer spending, manufacturing production, and inflation have partly reversed the softening trends that we had seen in the data just a month ago," Powell said in his testimony. "Some of this reversal likely reflects the unseasonably warm weather in January in much of the country."

"Still, the breadth of the reversal along with revisions to the previous quarter suggests that inflationary pressures are running higher than expected at the time of our previous Federal Open Market Committee (FOMC) meeting."

Inflation has been moderating in recent months and the process of getting back down to 2% has a long way to go and is likely to be bumpy, he said. But there has been "little sign of disinflation thus far in the category of core services excluding housing, which accounts for more than half of core consumer expenditures."