Steeper Fed rate hike back on table after Powell's hawkish testimony

Pervasive inflation, a hot job market and a resilient consumer have put the option of a half-percentage-point interest rate hike on the table when the Federal Reserve meets at the end of March. 

Chair Jerome Powell told lawmakers during two days of back-to-back congressional testimony that policymakers are prepared to raise interest rates higher than previously expected and pick up the pace of increases in the face of hotter-than-expected economic data.

"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 in prepared remarks before the Senate Banking Committee. "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."

FED CHAIR POWELL SAYS INTEREST RATES ARE ‘LIKELY TO BE HIGHER’ THAN PREVIOUSLY EXPECTED

Central bankers are in the midst of the most aggressive campaign since the 1980s to crush persistently high inflation. Although the consumer price index has slowly fallen from a high of 9.1% notched in June, it remains about three times higher than the pre-pandemic average. 

Officials slowed the pace of rate increases to a quarter percentage point during their meeting last month, lifting the benchmark federal funds rate to a range of 4.5% to 4.75%. That followed a half-point increase at their December meeting and four consecutive 75-basis-point moves before that. The central bank typically moves rates in quarter-point increments. 

At the time, policymakers suggested that slower rate moves could allow them to better assess the impact that tighter monetary policy is having on the economy.

INFLATION STILL OUTSTRIPPING WAGES IN MOST US CITIES

But since then, economic data has consistently surprised to the upside, suggesting that steeper interest rates are so far having a minimal effect on the economy and that inflation remains pervasive. 

Employers added 517,000 jobs in January, shocking economists who are scratching their heads over the continued strength of the labor market. Inflation also marched higher last month, with the consumer price index rising 0.5% in January, the most in three months. The annual inflation rate also came in higher than expected at 6.4%.

Meanwhile job openings remain historically high. The Labor Department said Wednesday that there were more than 10.8 million job openings in January. Economists surveyed by Refinitiv expected 10.5 million. 

Powell on Wednesday stressed that incoming data — including the February jobs report on Friday and fresh inflation data next week — will play a big role in the Fed's decision during its March 21-22 meeting. 

"We have some potentially important data coming up," Powell said. "Those will be important and we’ll scrutinize them… We have not made any decision about the March meeting."

The data, along with Powell's comments, has prompted some traders to reexamine their rate-hike expectations for the year, with a growing number of investors now betting the Fed could raise rates by 50 basis points later this month. Some 78% of traders are bracing for a steeper rate hike later this month, according to data from the CME Group's FedWatch tool, up from just 29% one week ago.

"If economic data remain robust and inflation refuses to budge lower," said Jeffrey Roach, chief economist at LPL Financial. "The Federal Open Market Committee will likely feel compelled to raise rates higher than the market expects."

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