Inflation data prompts Fed to act more aggressively
US Federal Reserve Chairman Jerome Powell warned that interest rates are likely to be increased more than central bankers initially expected, writes CNBC.
Citing data from earlier this year that showed inflation had returned to accelerating, the central bank leader warned that tighter monetary policy could be expected to slow the growing economy.
“The latest economic data is stronger than forecast, suggesting that the final level of interest rates is likely to be higher than previously expected,” Powell said, according to notes prepared for his two appearances this week. “If the body of data shows that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”
His words have two implications. First, that the peak, or final, level of interest rates is likely to be higher than earlier indications from Fed officials. And second, that February’s move to a smaller increase could be short-lived if inflation data continues to be hot.
In its December forecast, the Fed set a peak of 5.1%. After Powell’s comments, expectations are for more like 5.5-5.75%, according to CME Group data. Powell did not specify how high interest rates would go.
The speech comes at a time when markets are generally optimistic that the central bank can rein in inflation without pushing the economy into the ditch. Stocks fell sharply, while Treasury yields jumped after Powell’s remarks were released.
Data from January showed that inflation was still at around 5.4%. That’s well above the Fed’s long-term target of 2% and slightly above the December level.
Powell said that the current trend shows that the Federal Reserve’s job to fight inflation is not yet finished.
“We have done a lot of work, and the full effect of the tightening is yet to be felt. However, we still have a lot of work to do,” he points out.
