Federal Reserve Chair Warns Of Further Interest Rate Hikes In Report To Senate Banking Committee

“The ultimate level of interest rates is likely to be higher than previously anticipated.”

In his biannual Monetary Policy Report to the Senate Committee on Banking on Tuesday, Federal Reserve chair Jerome Powell said that the Fed is “prepared to increase the pace of interest rate hikes” to help inflation return to its 2% target.

“If totality of incoming data indicates faster tightening is warranted, we are prepared to increase pace of rate hikes,” said Powell, warning of possible additional rate hikes.

Powell said that the central bank will continue to make decisions meeting by meeting, based on totality of incoming data and implications for outlook for growth and inflation. So far, a series of interest rate hikes that began in 2022 has resulted in a little slowing of inflation, and it remains a concern.

“Ongoing increases in policy rate likely appropriate in order for stance to be sufficiently restrictive to get inflation back to 2% over time,” he said.

Data from January employment, consumer spending, manufacturing production inflation have partly reversed the softening trends that we’ve seen in the data just a month ago. Some of this reversal likely reflects the unseasonably warm weather in January in much of the country.

Still, the breadth of the reversal along with revisions to the previous quarter suggests that inflationary pressures are running higher than expected at the time for a previous FOMC meeting. from a broader perspective, inflation has moderated somewhat since the middle of last year but remains well above the FOMC is longer run objective of 2%.

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. The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to play to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we’d be prepared to increase the pace of rate hikes. — Jerome Powell

With inflation at levels that the economy had not experienced since the 1980s, the Fed took action last year with a series of increases to the Federal Funds rate last year. The rate was below 1% for a long stretch from December 2009 until April 2017, and then again from May 4, 2020, to May 23, 2022. Following multiple hikes in 2022, the Federal Funds rate currently stands at 4.58%… and it likely will go higher.

“It’s hard to make case we have overtightened. We need to continue to tighten,” Powell said, adding that the economy would need softening in labor market to get to the 2% target inflation figure. “Inflation is extremely high and hurting working people of this country badly. We are taking the only measures we have to bring inflation down.”

The Federal Open Market Committee (FOMC) meets toward the end of this month (March 21-22), we can expect another increase. That hike could be 50 basis points or more. At this point, there is much uncertainty of where rates will be by the end of the year.

The impact on small businesses can be significant. Companies that have flexible rate loans have seen their rates on their small business loans double in a year’s time. Some firms are paying more than 10% interest on existing business loans. This reality negatively impacts cash flow and, naturally, profitability. Firms that are looking to make improvements or expand now must seriously examine the cost of capital and determine whether or not they should delay their plans.

However, a tight labor market and lingering inflation are not helpful to business owners either. The Fed is committed to its 2% target rate of inflation. Hopefully, their course will result in deflation, but not a full-blown recession.