Here’s what the Fed Chair said this week and why it matters

Federal Reserve Chairman Jerome H. Powell used his testimony before lawmakers this week to outline a more aggressive path for US monetary policy as the central bank tries to fight stubbornly fast inflation.

Mr Powell, speaking before the House Financial Services Committee on Wednesday and the Senate Banking Committee on Tuesday, said the economy had been more resilient – and inflation had shown more staying power – than expected.

He signaled that he and his colleagues are ready to respond with rate hikes, and more quickly if necessary, although he stressed on Wednesday that no decision had been made ahead of the central bank’s March 22 meeting. Mr Powell made it clear that the next move would depend on a set of jobs and inflation data points to be released next week.

Stocks initially swooned and a common recession indicator flashed red on Tuesday as investors announced their expectations for the height of Fed interest rates in 2023 and increasingly bet on a larger move in March. But they rallied on Wednesday, with the S&P 500 ending the day slightly up.

Here are the key points that emerged during the two days of testimony.

Prices can rise faster.

Mr Powell surprised many investors when he suggested the pace of rate hikes could pick up again.

“If the body of data suggested that faster tightening was warranted, we would be willing to increase the pace of rate hikes,” Mr Powell told lawmakers in both houses. He was cautious on Wednesday to stress that “no decision has been made on this”.

While Mr Powell avoided promising anything, his comments suggested the Fed could hike rates by half a point in March if data reports remain hot in the coming days – which would mean a reversal.

Frequently asked questions about inflation

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What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar won’t go as far tomorrow as it did today. It is usually expressed as the annual change in the price of essential goods and services such as food, furniture, clothing, transportation and toys.

What Causes Inflation? This may be the result of increasing consumer demand. However, inflation can also rise and fall on developments that have little to do with economic conditions, such as E.g. limited oil production and problems in the supply chain.

Is inflation bad? It depends on the circumstances. Rapid price increases mean problems, but moderate price increases can lead to higher wages and job growth.

Can inflation affect the stock market? Rapid inflation usually spells trouble for stocks. Financial assets in general have historically performed poorly during inflationary booms, while tangible assets like houses have held up better.

Last year, the Fed made four interest rate hikes of three quarter points. It then slowed to a half-point in December and a more traditional quarter-point rise in February. Several officials have said in recent weeks that they are now more focused on where their policy rate would peak than how quickly it would get there.

The fact that another major movement is on the table underscores how much recent reports – suggesting that inflation is more persistent and economic momentum stronger than previously thought – have unsettled and confused policymakers. They are now trying to keep their options open while waiting for additional data that may provide more clarity.

And it puts a big focus on the two major economic reports coming out before the Fed’s March 22 meeting: a jobs report on Friday and fresh inflation numbers on Tuesday.

Prices will “probably” go higher.

“Recent economic data is stronger than expected, suggesting that the final interest rate level will likely be higher than previously expected,” Mr Powell told lawmakers on both days of testimony.

Such a warning – that rates will rise higher than the 5% to 5.25% range expected when the Fed released its latest guidance in December – was largely expected given recent robust data.

Continued resilience is a recipe for an aggressive Fed response, as central bankers believe they must slow the economy to fight inflation. Investors are increasingly expecting interest rate spikes above 5.5 percent this year and have even acknowledged a small chance that they could spike above 6.25 percent.

The job market will slow, but how painful is unclear.

Several lawmakers this week urged Mr. Powell to say the quiet part when it comes to the Fed’s anti-inflation policy. Interest rates work by slowing down the economy, including the job market. That’s slowing wage growth, and the Fed predicts the measures will push unemployment higher.

Understand inflation and how it affects you

But Mr. Powell refused to say the Fed wanted to induce higher unemployment. He stressed that this business cycle is very different from previous ones – the pandemic has messed everything up – and that the job market could potentially slow significantly without leading to widespread layoffs.

In an unusually irritated exchange Tuesday with Senator Elizabeth Warren, a Democrat from Massachusetts, Mr Powell also argued that working people would be worse off if the Fed didn’t control inflation.

“Inflation is extremely high and is very damaging to the working people of this nation,” he said. “We’re taking the only action we have to bring down inflation.”

The debt limit is a risk.

Mr. Powell was also asked to comment on an upcoming debate about raising the country’s debt ceiling — one that will threaten both Fed policy and the economy.

The federal government, which hit its technical debt limit on Jan. 19 and is using accounting maneuvers to keep paying its bills, is expected to exhaust those measures by this summer. At that point, Congress must suspend or raise the debt limit to avoid a default. So far, Republicans have insisted they will not raise the debt ceiling unless President Biden makes deep spending cuts, which the president has said he will not do.

The mere threat that the United States could not reach an agreement that would allow it to continue paying its debt would roil markets, analysts warn.

It could prove difficult for the Fed to keep raising interest rates in the face of looming financial disaster, so it could also temporarily derail the nation’s efforts to fight inflation. And it could have even more serious long-term consequences, potentially damaging America’s reputation for safety and soundness.

“Congress raising the debt ceiling is really the only alternative. There are no bunnies in hats to pull out,” Mr Powell said on Wednesday. “No one should assume that the Fed can protect the economy from non-payment of government bills, let alone a debt default or anything like that.”