Fed’s Jerome Powell says data will determine size of next rate hike

Mr Powell said the government’s February hiring and inflation reports, due to be released in the coming week, would shape the outcome of the March 21-22 meeting.

“I emphasize that no decision has been made on this,” Powell told the House Financial Services Committee. He inserted those words ad lib into his opening remarks which were otherwise identical to testimony given in the Senate on Tuesday, when he said officials were prepared to raise the rate more steeply if justified by “the totality of the data.” .

His comments indicated that Fed officials will debate whether to raise rates by a quarter point, as they did last month, or by a half point more, as they say. did in December.

They raised their benchmark federal funds rate to a range between 4.5% and 4.75% last month, their latest increase aimed at tackling inflation by slowing the economy. They have slowed the pace of rate hikes in their last two meetings after raising them by 0.75 points in four consecutive meetings last year.

Officials have spent the past two and a half months highlighting the benefits of slowing rate hikes to better gauge the impact of their past moves and explaining why the ultimate level of interest rates matters more than the magnitude. increase at a given meeting. They used quarterly interest rate projections – which will be updated when they meet in two weeks – to guide investors on their near-term intentions.

That had convinced many investors that the Fed had opted for a strategy of raising rates in quarter-point increments until officials saw enough evidence the economy was slowing for them to pause hikes. rate. So when Mr. Powell signaled that a half-point rate hike was in play on Tuesday, it caused a significant shift in market expectations.

Powell opened the door to a bigger rate hike this week after several economic reports showed hiring, spending and inflation were higher in January than expected. Equally important, data revisions showed that inflation and labor demand have not fallen as much as initially predicted at the end of last year.

Employers added 517,000 jobs in January, a surge that shocked economists who expected a slowdown in hiring. The Department of Labor is expected to report February hiring this Friday.

Meanwhile, the decline in inflation at the end of last year came to a halt in January. The 12-month inflation rate, excluding volatile food and energy items, was 4.7%, down from 4.6% in December, as measured by the Commerce Department’s Personal Consumption Expenditures Price Index.

The data surprised the Fed, which has tried to rein in investment, spending and hiring by raising rates, which makes borrowing more expensive and can lower the price of assets such as stocks and currency. real estate. The federal funds rate influences other borrowing costs across the economy.

The economy’s seemingly subdued response so far to aggressive Fed rate hikes last year reflects unusual dynamics resulting from the pandemic and the government’s policy response. “Today’s economy is no longer as interest rate sensitive as it was in decades past, and its resilience, while a virtue, complicates matters for the Fed,” said Rick Rieder, BlackRock . Inc.

Chief Investment Officer, Global Fixed Income.

Market expectations of a half-point or 50-basis-point Fed rate hike rose slightly on Wednesday after Mr. Powell’s remarks and after a government report showed that offers of employment remained high in January.

“The threshold for them not to make 50 is very high given the way the data is coming in,” said Diane Swonk, chief economist at KPMG. “So far, all data continues to be on the 50 side.”

Powell could face a tricky task in forging consensus among the 18 policymakers who attend Fed rate-setting meetings. A move to a larger rate hike could lead to pushback from some officials who had worried about raising rates in larger increments and could confuse the central bank’s strategy.

“It’s about creating an option,” Ms. Swonk said. While it may be embarrassing for the central bank to accelerate rate hikes just after slowing them down, “it is more humiliating to get the overall policy wrong. This is important if you say you are dependent on data to change your priors.

Powell reiterated on Wednesday that Fed officials were likely to raise rates this year higher than expected to keep inflation under control. In December, most thought they would raise their benchmark federal funds rate this year to between 5% and 5.5% and hold it until 2024.

Many forecasters now expect the Fed to expect rates to reach around 5.75% this year. The strength of the labor market and signs of more persistent inflation create “a reasonable chance that the Fed will have to cut the fed funds rate to 6% and then hold it there for an extended period to slow the economy and bring inflation back to almost 2%,” Mr. Rieder said.

The Fed last raised rates to 5.25% in 2006, and rates haven’t risen above that level since 2001.

If the Fed raises the federal funds rate closer to 6%, the odds of a more severe downturn increase “pretty dramatically,” Ms. Swonk said.

While the risk of a recession in an election year could cause heartburn for Democrats as President Biden prepares to run for re-election, Mr Powell has heard few complaints from lawmakers in two days of testimony in Congress, suggesting little political resistance so far.

“Even though rates have risen significantly over the past year, most members expressed support for President Powell to continue to fight inflation, and few criticized him,” said Andrew Olmem, partner. at Mayer Brown and former chief counsel for the Republicans in the Senate. Committee.

Write to Nick Timiraos at Nick.Timiraos@wsj.com