Federal Reserve Chairman Jerome Powell warned Congress on Wednesday that more aggressive interest rate hikes could be on the horizon. Powell testified before the Senate Banking Committee where he cited a stronger economy and stated that bigger hikes may be necessary to address inflation. The Fed has been using 0.25% hikes as of late.
“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,” Powell said.
The Federal Reserve has hiked rates several times to help combat inflation, which soared in recent years. Although inflation is not rising as quickly now, it remains unclear whether a leveling off will come soon.
Powell acknowledged that the process of getting inflation back down to 2% will be bumpy and have a long way to go. After his comments, the Dow Jones fell several hundred points.
“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. 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 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.”
In conclusion, Federal Reserve Chairman Jerome Powell’s comments signaled a warning of more aggressive interest rate hikes in the future. The Fed’s goal is to address inflation as a result of a stronger economy, but it remains uncertain whether this will lead to a leveling off soon.