Federal Reserve Chairman Jerome Powell issued a warning to Congress regarding the possibility of more aggressive interest rate hikes, citing a stronger economy as the reason. Speaking before the Senate Banking Committee on Wednesday, Powell stated that bigger hikes could be necessary to address inflation.
“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.
While the Federal Reserve has been using 0.25% hikes as of late, Powell’s comments indicate that the Fed may increase rates by a larger margin in the near future. Powell is expected to testify again on Wednesday.
The Federal Reserve has hiked rates several times in recent years to help combat inflation, which has soared. Although inflation is not rising as quickly now, it remains unclear whether a leveling off will come soon.
“The process of getting inflation back down to 2% has a long way to go and is likely to be bumpy,” Powell told the committee.
Powell’s comments had a significant impact on the stock market, with the Dow Jones falling several hundred points in response.
“Unsurprisingly, Chairman Powell delivered a message with hawkish undertones in his testimony to Congress,” said Charlie Ripley, Senior Investment Strategist for Allianz Investment Management. “While acknowledging the recent string of economic data has been ‘stronger than expected,’ he reiterated that ongoing increases in policy rates are warranted. While some market participants might have been caught off guard by Powell’s comments, the reality is that he is largely affirming what the bond market has already priced in. The terminal level for policy rates will be slightly higher than previous expectations as the timing of an economic slowdown has been pushed further down the road.”
Despite the concerns, Powell’s comments were not surprising to some experts.
“Chairman Powell said explicitly what many market participants were already inferring – the economic data is coming in stronger than expected and rates are going to have to go higher and stay there for longer than previously believed,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance. “Judging by the initial market reaction, most of this was already priced in, but there must have been some holdouts who truly believed that the Fed would be cutting this year and that is extremely unlikely at this point.”
Powell’s comments come at a time when many are concerned about the potential impact of inflation on the economy. Inflation has been rising rapidly in recent years, leading some to worry about the possibility of a recession.
While Powell’s comments may be cause for concern, some experts believe that they are necessary to prevent the economy from overheating.
“We need to get interest rates back up to a more normal level in order to prevent inflation from getting out of control,” said John Williams, president of the Federal Reserve Bank of New York.
Powell’s testimony is likely to continue to be a major focus of attention in the coming days as investors and policymakers alike try to determine what impact his comments will have on the economy.