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The Fed: Powell to talk to Congress about the possibility of more interest-rate hikes, not fewer

Fed Chairman Jerome Powell next week will tell Congress that the central bank is thinking about the possible need to to push rates higher to cool inflation. Read More...

The Federal Reserve Chairman’s testimony to Congress next week is likely to be very succinct and can be summed up neatly as ” the risks of doing too little are far greater than the risks of doing too much,” economists said Friday.

“The Fed is getting a little more hawkish than we pictured them at the end of last year,” said Michael Gregory, deputy chief economist at BMO Capital Markets.

Powell will testify on Tuesday to the Senate Banking Committee and on Wednesday to the House Financial Services panel. Both hearings are set to begin at 10 a.m. Eastern.

Recent economic data is putting pressure on the Fed to be more aggressive in its monetary policy, economists said.

Less than two months ago, the narrative was that the U.S. economy was slowing and inflation was cooling and maybe the Fed only needed to raise interest rates a couple more times.

But since then, things have changed significantly.

The economy has perked up, job growth shot up in January, and revisions to the data erased the sense that inflation was cooling.

“Powell is going to emphasize the Fed has more work to do. That the job is not done and they are going to keep at it until the job is done,” said Laura Rosner-Warbuton, senior economist at MacroPolicy Perspectives.

“The Fed has been whipsawed by the data,” she added.

The Fed will meet to set interest rates on March 21-22. Ahead of that meeting will be February reports on jobs, consumer inflation and retail sales.

The central bank will want to see those reports to decide next steps, Rosner-Warbuton said.

At its meeting last month, the Fed slowed the pace of its interest rate hikes to a quarter-percentage point after six larger increases since the summer of 2022.

Both Gregory of BMOP and Rosner-Warbuton expect the Fed to stick to the quarter-percentage point pace in March.

“I think the bar is really high for them to reaccelerate the pace of rate hikes,” she said.

Some market participants have speculated about the possibility of a larger half-percentage point move at the March meeting after two Fed officials said they had pushed for a similar-sized move in March.

In his two days of testimony, Powell won’t say anything definitive about the path of interest rates because the February employment, consumer-price inflation and retail sales data will be released before the Fed’s interest-rate committee meets, economists said.

“They want to really see reports for February to decide next steps,” Rosner said.

Powell might not take a half-point rise off the table, but he could downplay the possibility, she added.

The general sense is that Fed officials don’t like to slow down the pace of rate hikes and then speed back up.

“It would be a powerful ‘uh-oh’ message. I don’t think they will ramp up the cadence,” Gregory said.

The Fed’s hawkish “higher for longer” message in March is expected to come in the “dot plot” projections of the likely endpoint for interest rate hikes.

In December, the Fed penciled in a 5%-5.25% end-point. Economists expect the Fed to raise that. The tone of the February data is likely to play a pivotal role in whether the Fed pencils in one more rate hike to a range of 5.25%-5.5% or two to 5.5%-5.75%.

And if the inflation data doesn’t cool, we’ll soon be talking about 6%, Gregory noted.

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