Jerome H. Powell, the chair of the Federal Reserve, used his testimony before lawmakers this week to lay out a more aggressive path ahead for American monetary policy as the central bank tries to combat stubbornly rapid inflation.
Mr. Powell, who spoke before the House Financial Services Committee on Wednesday and the Senate Banking Committee on Tuesday, explained that the economy had been more resilient — and inflation had shown more staying power — than expected.
He signaled that he and his colleagues were prepared to respond by raising rates, and doing so more quickly if needed, though he emphasized on Wednesday that no decision had been made ahead of the central bank’s meeting on March 22. Mr. Powell made clear the next move would hinge on a series of job market and inflation data points set for release over the next week.
Stocks initially swooned and a common recession indicator flashed red on Tuesday as investors marked up their expectations for how high Fed rates would rise in 2023 and increasingly bet on a larger March move. The fall in stocks reversed somewhat on Wednesday as Mr. Powell underlined that no decision on policy had been made.
Here are the key points that emerged over the two-day testimony.
Rates may climb faster.
Mr. Powell surprised many investors when he suggested that the pace of rate increases could pick back up.
“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 told lawmakers in both chambers. He was careful on Wednesday to underscore that “no decision has been made on this.”
While Mr. Powell avoided promising anything, his comments suggested that the Fed could lift rates by a half-point in March if data reports over the coming days remained hot — which would signify a reversal.
Inflation F.A.Q.
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.
What causes inflation? It can be the result of rising consumer demand. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.
Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains can lead to higher wages and job growth.
How does inflation affect the poor? Inflation can be especially hard to shoulder for poor households because they spend a bigger chunk of their budgets on necessities like food, housing and gas.
Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.
Last year, the Fed made four three-quarter-point rate moves. It then slowed to a half-point in December and to a more traditional quarter-point increase in February. Several officials said in recent weeks that they were now more focused on where their policy rate would peak than on how quickly it would get there.
The fact that a bigger move is again on the table underscores how much recent reports — which have suggested that inflation is more stubborn and economic momentum is stronger than previously thought — have unsettled and confused policymakers. They are now trying to keep their options open as they await additional data that could provide more clarity.
And it puts a huge focus on the two major economic reports coming ahead of the Fed’s meeting on March 22: an employment report on Friday and fresh inflation figures on Tuesday.
Rates are ‘likely’ to go higher.
“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,” Mr. Powell told lawmakers on both days of testimony.
Such a warning — that rates will climb higher than the range of 5 percent to 5.25 percent expected when the Fed last released projections, in December — was largely expected given recent robust data.
Continued resilience is a recipe for an aggressive Fed response, because central bankers believe they need to slow the economy to wrestle down inflation. Investors increasingly expect rates to peak above 5.5 percent this year, and have even penciled in a small chance that they could go above 6.25 percent.
The labor market will slow, but how painfully is unclear.
Several lawmakers pressed Mr. Powell this week to say the quiet part out loud when it comes to the Fed’s inflation-fighting policy. Interest rates work by slowing the economy, including the job market. That slows wage growth, and the Fed forecasts that the actions will push up unemployment.
Understand Inflation and How It Affects You
But Mr. Powell refused to say the Fed wanted to engineer higher joblessness. He emphasized that this business cycle was very different from previous ones — the pandemic has muddled everything — and that the job market might be able to slow significantly without leading to widespread layoffs.
In an uncharacteristically testy exchange on Tuesday with Senator Elizabeth Warren, Democrat of Massachusetts, Mr. Powell also argued that it would be worse for working people if the Fed failed to control inflation.
“Inflation is extremely high, and that it is hurting the working people of this nation badly,” he said. “We are taking the only measures that we have to bring inflation down.”
The debt limit is a risk.
Mr. Powell was also asked to comment on a coming debate over raising the nation’s debt limit — one that is looming over both Fed policy and the economy.
The federal government, which hit its technical debt limit on Jan. 19 and has been employing accounting maneuvers to continue paying its bills, is expected to exhaust those measures by this summer. At that point, Congress will need to suspend or increase the debt limit to avoid a default. So far, Republicans are insisting they won’t increase the debt limit unless President Biden makes deep spending cuts, which the president has said he will not do.
The mere threat that the United States might fail to come to an agreement that would allow it to keep paying on its debts would roil markets, analysts warn.
It might prove difficult for the Fed to continue raising interest rates into a looming financial disaster, so it could also temporarily derail the nation’s inflation-fighting efforts. And it could carry even more severe long-term consequences, potentially hurting America’s reputation for safety and soundness.
“Congress raising the debt ceiling is really the only alternative. There are no rabbits in hats to be pulled out on this,” Mr. Powell said on Wednesday. “No one should assume that the Fed can protect the economy from the nonpayment of the government’s bills, let alone a debt default or something of that nature.”
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