Federal Reserve Chairman Jerome Powell told lawmakers Tuesday that rate hikes could be faster, higher and last for longer than markets anticipate, noting that future decisions will be based on the 'totality' of incoming data, including the upcoming jobs report.
In prepared remarks to the Senate Banking Committee as part of his presentation of the Feds 'Semiannual Monetary Policy Report’, Powell said recent data, particularly with respect to consumer pressures, has come in faster than expected, with few signs of disinflation in the core services sector of the U.S. economy.
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"Although inflation has been moderating in recent months, the process of getting inflation back down to 2% has a long way to go and is likely to be bumpy," Powell said. "As I mentioned, 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.
"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," Powell added. "Restoring price stability will likely require that we maintain a restrictive stance of monetary policy for some time."
U.S. stocks reacted to the statement by paring earlier gains, with the S&P 500 last marked 61 points lower in early afternoon trading while the Dow Jones Industrial Average fell 568 points.
Benchmark 10-year Treasury note yields were 5 basis points higher at 3.973% in volatile trading following the Chairman's testimony while 2-year notes were pegged 10 basis points higher on the session at 5.021%, the highest since 2007. The U.S. dollar index, which tracks the greenback against a basket of its global peers, was marked 1.15% higher at 105.561, the highest since early January.
The CME Group's FedWatch is now pricing in a 69% chance of a 50 basis point Fed rate hike on March 22, up from just 9.2% late last month, with the odds of a Fed Funds rate that tops 5.5% in July rising past 75% for the first time this year.
A host of economic data releases -- both here in the U.S. and in markets around the world -- have indicated that inflationary pressures have remained stubbornly high, and deeply imbedded, despite some of the most significant central bank rate hikes in at least a generation.
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Last month, data showing sticky consumer price pressures over the month of January, with a headline rate increase of 0.5%, was quickly followed by the strongest monthly gain for retail sales in two years.
Both of those data points, of course, were presaged by a blowout January jobs report that showed 517,000 new positions added to the economy, taking the headline unemployment rate to a five-decade low of 3.4%.
Powell, in fact, told the Economic Club of Washington, D.C. in February that the labor market is "incredibly strong ... certainly stronger than anyone expected" and warned that "if we continue to get strong labor market reports or higher inflation reports, it might be the case that we have to raise rates more" than is now expected."
“As the economic data continues to paint a US economy in rude health, it has become clear that markets got somewhat ahead of themselves on talks of interest rate pauses and potential pivots to rate cuts," said Richard Carter, head of fixed interest research at Quilter Cheviot. "Sticky inflation means interest rate rises will remain on the table for as long as employment remains robust ... and there is now an increased focus on Friday’s jobs data and what this may mean for the future direction of rates."
The Labor Department's February jobs report, scheduled for Friday at 8:30 am Eastern time, is expected to show that the economy added around 205,000 new positions last month, with average hourly earnings rising 4.8% on the year -- and 0.3% from January -- with a headline unemployment reading of 3.4%.
