Powell’s Hawkish Testimony Raises Prospect Of Larger March Hike

Federal Reserve Chair Jerome Powell struck a hawkish tone in Congressional testimony on March 7. He stated that there is “more work to do” as inflation is running “higher than expected” than at the Fed’s last meeting in February. Markets now expect rates to approach 6% by the summer, compared to under 5% currently.

Further Hikes Expected

The implication is that more rate hikes are coming. Markets are now concerned that the Fed’s March meeting could see some chance of a larger 0.5-percentage-point hike, as compared to a previously expected 0.25-percentage-point increase.

Rate increases could continue until the Fed’s July meeting. There is some chance, in the view of fixed income markets, that rates now approach 6% by the summer. Specifically, Powell stated that, “the ultimate level of interest rates is likely to be higher than previously anticipated. 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.”

Inflation Concerns

The Fed’s concern, prompted in large measure by worrying economic data for January, is that inflation is not coming down fast enough. Specifically, Powell stated that there has been “little sign of disinflation thus far in the category of core services excluding housing” and a labor market that remains “extremely tight”. More generally, core PCE inflation, the Fed’s preferred inflation measure, which excludes food and energy is at 4.7% for January, down from a peak of 7%. Inflation has fallen, but not enough for the Fed.

Dual Mandate

In response to questioning, Powell noted the Fed’s dual mandate for maximum employment and price stability. For now that’s not a major constraint as unemployment is at historically low levels, and above what some would consider full employment. That frees up the Fed’s policy actions to fight inflation. However, if unemployment did rise then the Fed would have more of a trade-off to make as higher rates could cut inflation but also hurt the jobs market.

Rate Decisions

The implication is that for upcoming Fed meetings, based on current data, the Fed will continue to raise rates and will continue to hold rates at high levels for many months. One key question is whether January’s economic data, which was unfavorable those hoping for falling inflation, is a temporary spike or an unwelcome trend. We’ll learn more with the upcoming CPI numbers for February on March 14 ahead of the Fed’s next interest rate decision on March 22.