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

Mr. Powell said the government’s reports on employment and inflation for February, due to be released over the next week, would shape the outcome of the March 21-22 meeting.

“I can confirm that no decision has been made on this,” Powell told the House Financial Services Committee. He included those ad lib words in his opening remarks that were identical to testimony delivered Tuesday in the Senate, when he said officials were willing to make an even larger rate increase if warranted by “gross data.”

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

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

Officials have spent the past two and a half months highlighting the benefit of slowing rate increases so they can better assess the impact of their past moves and explain why the final level of interest rates is more important than the size of the increase at a given meeting. They used quarterly interest rate forecasts – which they will update at their meeting in two weeks – to guide investors about their near-term intentions.

This convinced many investors that the Fed had settled on a strategy of raising interest rates in quarter-point increments until officials saw enough evidence that the economy was slowing for them to put rate hikes on hold. So when Powell signaled that a half-point rate hike was in the works on Tuesday, it sent a huge shift in market expectations.

Mr. Powell opened the door to a larger rate hike this week after several economic reports revealed that hiring, spending and inflation were hotter in January than expected. And just as importantly, revisions to the data showed that inflation and job demand did not fall as much as initially reported late last year.

Employers added 517,000 jobs in January, an increase that shocked economists who were expecting a slowdown in hiring. The Labor Department is scheduled to report on February employment this Friday.

Meanwhile, the decline in inflation late last year stalled in January. The 12-month rate of inflation, excluding volatile food and energy, was 4.7%, up from 4.6% in December, according to the Commerce Department’s personal consumption expenditures price index.

The data surprised the Federal Reserve, which has been trying to rein in investment, spending and employment by raising interest rates, which makes borrowing more expensive and can lower the prices of assets such as stocks and real estate. The federal funds rate affects other borrowing costs throughout the economy.

The economy’s seemingly subdued response, so far, to extreme Fed rate increases last year reflects the unusual dynamics stemming from the pandemic and the government’s policy response. said Rick Reader, of BlackRock a company

Chief Investment Officer for Global Fixed Income.

Market expectations rose by half a point, or 50 basis points, for a Fed rate increase on Wednesday after Mr. Powell’s comments and after a government report showed that employment remained high in January.

“The bottom line for them to not do 50 is very high given the way the data is coming in,” said Diane Swonk, chief economist at KPMG. “So far, all data is still in the 50-side.”

Mr. Powell may face the difficult task of reaching consensus among the 18 policymakers who participate in the Fed’s rate-setting meetings. A shift to a larger rate hike could alienate some officials who have been wary of raising interest rates in larger increments and could create confusion about the central bank’s strategy.

“This is about creating electives,” Ms. Sunk said. While it may be embarrassing for a central bank to speed up interest rate increases immediately after slowing them down, “it is much more insulting to get policy wrong. It is important to say that you are relying on data to change your premises.”

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

Many forecasters now expect the Fed to see interest rates rise to around 5.75% this year. The strength of the labor market and signs of persistent inflation “create a reasonable chance that the Fed will have to raise the federal funds rate to 6%, and then hold it for an extended period to slow the economy and reduce inflation to close to 2%,” Mr. Reeder said.

The Fed last raised interest rates to 5.25% in 2006, and rates have not been higher than this level since 2001.

If the Fed raises the federal funds rate to close to 6%, the odds of a sharper deflation would rise “quite dramatically,” Ms. Sunk said.

While the risk of an election year recession could cause heartburn for Democrats as President Biden prepares to run for re-election, Powell heard few complaints from lawmakers over two days of congressional testimony, suggesting little political resistance for now.

“Although interest rates have risen dramatically over the past year, most members indicated support for President Powell to continue to fight inflation, and a few criticized him,” said Andrew Ulm, partner at Meyer Brown and former senior adviser to Senate Republicans on banking. A committee.

Write to Nick Timiraos at [email protected]