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Rate hikes to become ‘higher than previously expected’


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

Inflation has defied the Fed’s efforts to tame it and central bank officials will need to raise benchmark interest rates higher than previously forecast, Fed Chairman Jerome Powell told the Senate Banking Committee at a hearing on Tuesday. The Federal Reserve had been leaning toward tapering hikes as recently as February, but Powell left the door open to re-accelerating increases. He testified that to fully quell inflation, the central bank would need to keep interest rates high “for some time.”

“Recent economic data has been stronger than expected, suggesting that the final level of interest rates is likely to be higher than previously expected,” Powell said. “If the body of data shows that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”

Powell’s comments underscored how much central bank policymakers have changed their outlook based on February’s economic data. Those reports showed that inflation, the labor market and consumer spending remained hot, despite the Fed’s efforts over the past year to cool them by raising interest rates.

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

Higher borrowing costs are also putting business 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 recession.

Almost a year after the start of the Federal Reserve’s campaign to raise interest rates against inflation, the Fed’s benchmark interest rate rose to a range of 4.5% to 4.75%, its highest level since 2007. from almost zero.

As a result of Powell’s testimony, traders raised their expectations for how high the Fed would raise rates, expecting 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 of trading data. Traders are now betting the Federal Reserve will raise interest rates by a half-point when they meet in March, up from the quarter-point hike that was forecast on Monday.

Powell faced pushback from Democrats who questioned whether raising interest rates — the central bank’s main tool for controlling inflation — was the right way to deal with rising prices.

Sen. Sherrod Brown of Ohio blamed inflation on corporate greed, not workers’ pay, noting that companies raised prices while boasting record profits, plowing the money into extravagant executive pay and stock buybacks to benefit shareholders.

“A cooling economy means layoffs. “Decreased demand means workers are getting fewer raises,” Brown said. “There are other ways we can lower prices instead of reducing demand — again, by making people poorer, laying people off and denying workers raises.”

Brown’s criticism was echoed by Sen. Elizabeth Warren, a progressive Democrat from Massachusetts. Warren took issue with Powell over the Fed’s own projections that taming inflation by raising interest rates would raise the unemployment rate from its current level of 3.4 percent — its lowest level in more than 50 years — to 4. 6%. This would mean another 2 million 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 plan to lay off in the next year, what would you say to them? How would you explain your opinion that they should lose their jobs?” Warren said.

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

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

Joanna Swanson

Joanna Swanson is Europe correspondent at the Thomson Reuters Foundation based in Brussels covering politics, culture, business, climate change, society, economies and inclusive tech. With specific focus in breaking news, she has covered some of the world's most significant stories.