Jerome Powell Says Interest Rate Raises Likely to Be Higher Than Expected

Jerome H. Powell, the Federal Reserve chair, made clear on Tuesday that the central bank is prepared to react to recent signs of economic strength by raising interest rates higher than previously expected and, if incoming data remain hot, potentially returning to a quicker pace of rate increases.

Mr. Powell, in remarks before the Senate Banking Committee, also noted that the Fed’s fight against inflation was “very likely” to come at some cost to the labor market.

His comments were the clearest acknowledgment yet that recent reports showing inflation remains stubborn and the job market remains resilient are likely to shake up the policy trajectory for America’s central bank.

The Fed raised interest rates last year at the fastest pace since the 1980s, pushing borrowing costs above 4.5 percent, from near zero. That initially seemed to be slowing consumer and business demand and helping inflation to moderate.

But a number of recent economic reports have suggested that inflation did not weaken as much as expected last year and remained faster than expected in January, while other data showed hiring remains strong and consumer spending picked up at the start of the year.

While some of that momentum could have owed to mild January weather — conditions allowed for shopping trips and construction — Mr. Powell said the unexpected strength would probably require a stronger policy response from the Fed.

“The process of getting inflation back down to 2 percent has a long way to go and is likely to be bumpy,” he told the committee. “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.”

Fed officials projected in December that rates would rise to a peak of 5 to 5.25 percent, with a few penciling in a slightly higher 5.25 to 5.5 percent. Mr. Powell suggested that the peak rate would need to be adjusted by more than that, without specifying how much more.

He even opened the door to faster rate increases if incoming data — which include a jobs report on Friday and a fresh inflation report due next week — remain hot. The Fed repeatedly raised rates by three-quarters of a point in 2022, but slowed to half a point in December and a quarter point in early February.

“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,” Mr. Powell said.

Before his remarks, markets were heavily prepared for a quarter-point move at the Fed’s March 21-22 meeting. After his opening testimony, investors increasingly bet that the central bank would make a half-point move in March, stock prices lurched lower, and a closely watched Wall Street recession indicator pointed to a greater chance of a downturn. The S&P 500 ended the day down about 1.5 percent.

While Mr. Powell predicated any decision to pick up the pace of rate increases on incoming data, even opening the door to the possibility made it clear that “it’s definitely a policy option they’re considering pretty actively,” said Michael Feroli, chief U.S. economist at J.P. Morgan.

Mr. Feroli said a decision to accelerate rate moves might stoke uncertainty about what would come next: Will the Fed stick with half-point moves in May, for instance?

“It raises a lot of questions,” he said.

Blerina Uruci, chief U.S. economist at T. Rowe Price, previously thought the Fed would stop lifting interest rates around 5.75 percent but now thinks there is a growing chance they will rise above 6 percent, she said. She thinks that if Fed officials speed up rate increases in March, they may feel the need to keep the moves quick in May.

“Otherwise, the Fed runs the risk of looking like they’re flip-flopping around,” Ms. Uruci said.

While the Fed typically avoids making too much of any single month’s data, Mr. Powell signaled that recent reports had caused concern both because signs of continued momentum were broad-based and because revisions made a slowdown late in 2022 look less pronounced.

“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” meeting, Mr. Powell said.

He reiterated that there were some hopeful developments: Goods inflation has slowed, and rent inflation, while high, appears poised to cool down this year.

And Mr. Powell noted on Tuesday that officials knew it took time for the full effects of monetary policy to be felt, and were taking that into account as they thought about future policy.

Still, he underlined that “there is little sign of disinflation thus far” in services outside of housing, which include purchases ranging from restaurant meals and travel to manicures. The Fed has been turning to that measure more and more as a signal of how strong underlying price pressures remain in the economy.

“Nothing about the data suggests to me that we’ve tightened too much,” Mr. Powell said in response to lawmaker questions. “Indeed, it suggests that we still have work to do.”

When the Fed raises interest rates, it slows consumer spending on big credit-based purchases like houses and cars and can dissuade businesses from expanding on borrowed money. As demand for products and demand for workers cool, wage growth eases and unemployment may even rise, further slowing consumption and causing a broader moderation in the economy.

But so far, the job market has been very resilient to the Fed’s moves, with the lowest unemployment rate since 1969, rapid hiring and robust pay gains.

Mr. Powell said wage growth — while it had moderated somewhat — remained too strong to be consistent with a return to 2 percent inflation. When companies are paying more, they are likely to charge more to cover their labor bills.

“Strong wage growth is good for workers, but only if it is not eroded by inflation,” Mr. Powell said.

Despite such explanations, some lawmakers grilled the Fed chair on Tuesday over what the central bank expected to do to the labor market with its policy adjustments.

Senator Elizabeth Warren, Democrat of Massachusetts, suggested that the Fed was trying to “throw people out of work” and that millions of people stood to lose their jobs if unemployment rose as much as central bankers expected.

“I would explain to people, more broadly, that inflation is extremely high, and that it is hurting the working people of this nation badly,” Mr. Powell said. “We are taking the only measures that we have to bring inflation down.”

When Ms. Warren continued to press him on the Fed’s plan, Mr. Powell responded that the central bank was doing what policymakers believed was necessary.

“Will working people be better off if we just walk away from our jobs and inflation remains 5, 6 percent?” Mr. Powell asked.

He also underlined that the Fed does “not seek, and we don’t believe that we need to have,” a “very significant” downturn in the labor market, because there are many job openings, so it is possible that the labor market could cool quite a bit without outright job losses.

“Other business cycles had quite different back stories than this one,” he said. “We’re going to have to find out whether that matters or not.”

Joe Rennison contributed reporting.