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Federal Reserve chairman Jerome Powell warned on Tuesday the central bank may have to push interest rates higher than previously expected in order to curb stubborn inflation.
The warning, in testimony before the Senate Banking Committee, comes after a series of economic indicators that indicate the economy is running hotter than expected despite aggressive action from the Fed.
"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 told senators.
Over the last year, the central bank has raised interest rates eight times in an effort to tamp down demand. But after appearing to cool off late last year, both consumer spending and hiring came roaring back in January, putting more upward pressure on prices.
"Some of this reversal likely reflects the unseasonably warm weather in January," Powell said.
But he added that Fed policymakers may have to raise interest rates more aggressively at their next meeting in two weeks if upcoming data shows similar strength. The U.S. will release February jobs data on Friday, which will be followed by the monthly inflation report next week.
Markets are hit hard by Powell's comments
Investors had expected the Fed to raise rates by 0.25 percentage points at that meeting later this month. But odds of a larger, half-point increase rose sharply after Powell's testimony.
Powell also suggested that interest rates may ultimately have to climb higher than the 5 to 5.5% range that policymakers had predicted in December in order to bring prices under control. The Fed's benchmark rate is currently 4.50 to 4.75%.
The prospect of higher interest rates weighed on the stock market. The Dow Jones Industrial Average fell 575 points, or 1.7%.
Higher rates should help curb inflation. But the Fed's actions also risk sparking a recession and a rise in unemployment.
'Gambling with people's lives'
In a pointed exchange, Sen. Elizabeth Warren, D-Mass., challenged Powell about the potential job losses that could result from such aggressive rate hikes.
She noted the Fed's own December forecast showed the unemployment rate climbing to 4.6% by the end of this year. Warren said that would mean putting 2 million people out of work.
"You are gambling with people's lives," she said. "You cling to the idea that there's only one solution: Lay of millions of workers. We need a Fed that will fight for families."
Powell noted that the unemployment rate is currently at a half-century low, 3.4%, while families are paying a high price for inflation.
"We are taking the only measures we have to bring inflation down," the Fed chairman told Warren. "Will working people be better off if we just walk away from our job and inflation remains 5-6%?"
The debt ceiling fight also looms
Both Democrats and Republicans on the Senate Banking Committee tried to draw Powell into the looming fight over the federal debt ceiling.
Republicans are demanding the government rein in spending as a condition to raise the debt ceiling. Democrats accuse the GOP of risking a costly federal default if the debt ceiling is not raised and the government finds itself unable to pay its bills.
Powell avoided taking sides in the partisan wrangling.
"We do not seek to play a role in these policy issues," he said. "But at the end of the day, there's only one solution to this problem."
"Congress really needs to raise the debt ceiling. That's the only way out," Powell said. "And if we fail to do so, I think that the consequences are hard to estimate, but they could be extraordinarily adverse, and could do longstanding harm."
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Transcript :
ARI SHAPIRO, HOST:
The chairman of the Federal Reserve offered a stark warning about inflation today. In front of the Senate Banking Committee, Jerome Powell said the road back to stable prices looks to be long and bumpy, and he says it will likely take interest rates that are higher than expected to get prices under control. The Fed has already raised interest rates eight times in the last year, and the prospect of even higher rates is weighing on the stock market. NPR's Scott Horsley is here to explain. Scott, this was a much more ominous outlook than Powell was offering a month ago. What changed?
SCOTT HORSLEY, BYLINE: Yeah, inflation's proving to be more stubborn than a lot of forecasters had expected. And despite the Fed's best efforts to tap the brakes with higher interest rates, both hiring and spending have remained really strong. Employers added more than half a million jobs in January. At the same time, shoppers were opening their wallets at department stores and restaurants and car dealers. All that spending and all that hiring tends to put more upward pressure on prices. Now, there is some question about whether January's activity was kind of a fluke, driven by unusually warm weather that month. And we are going to learn a lot more in the next couple of weeks about how the job market and spending fared in February. But if the February numbers are anything like what we saw the month before, Powell says he and his colleagues are going to have to push the brakes a little bit harder.
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JEROME POWELL: 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.
HORSLEY: Most investors have been expecting the Fed to raise rates by a quarter percentage point at its next meeting in a couple of weeks. But after Powell's testimony today, markets are now betting on a larger half-point rate hike. The stock market isn't crazy about that idea. The Dow Jones Industrial Average tumbled 575 points today, or about 1.7%.
SHAPIRO: All right. So investors are not too happy. What are lawmakers saying about the Fed's plan?
HORSLEY: For the most part, lawmakers have been willing to give the Fed a lot of latitude to do whatever it takes to get prices under control. You know, nobody likes high inflation, but you are hearing some grumbling about the potential fallout of these higher interest rates, especially the possibility that it could lead to a weaker job market. Ohio Senator Sherrod Brown, who chairs the Banking Committee, says it's important that the Fed not undermine workers newfound bargaining power. And Massachusetts Senator Elizabeth Warren blasted the central bank's strategy, saying it threatens to put 2 million people out of work.
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ELIZABETH WARREN: Chair Powell, you are gambling with people's lives. You cling to the idea that there's only one solution - lay off millions of workers. We need a Fed that will fight for families.
HORSLEY: Now, Powell says the Fed is not trying to put anybody out of work, but he does argue high inflation is also hurting families.
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POWELL: Will working people be better off if we just walk away from our jobs and inflation remains 5, 6%?
WARREN: Well, let me...
HORSLEY: Powell also warned that if high inflation were to become entrenched, then it would be hard to have a strong job market going forward.
SHAPIRO: Let's talk about the debt ceiling. Powell was asked about that today, as well. What did he say?
HORSLEY: Yeah, Congress needs to raise the debt ceiling or else by sometime this summer or maybe early fall, the federal government won't be able to pay all of its bills. House Republicans are demanding some unspecified spending cuts in exchange for their votes to raise the debt limit. Democrats say that's reckless and that the Republicans are treating the full faith and credit of the government as a bargaining chip. Powell was trying to steer clear of this partisan fight today, but he did say there's only one way to avoid a potentially costly government default.
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POWELL: Whatever else may happen will happen, but Congress really needs to raise the debt ceiling. That's the only way out. And if we fail to do so, I think that the consequences are hard to estimate, but they could be extraordinarily adverse and could do long-standing harm.
HORSLEY: The last time we had a showdown like this back in 2011, it really rattled financial markets. And that's the last thing that a fragile economy needs now - is a rerun of that costly game of chicken.
SHAPIRO: NPR's Scott Horsley, thank you.
HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.