Federal Reserve Chair Jerome Powell softened his tone slightly during a second day of congressional testimony, saying policymakers will wait for fresh jobs and inflation data before deciding how much to raise interest rates later this month.
The Fed chief repeated his message from Tuesday that the U.S. central bank is likely to take rates higher than previously anticipated and that it could move at a faster pace if economic data keeps coming in hot. But he diverged slightly from his prepared remarks to qualify the statement.
“We have not made any decision about the March meeting,” Powell told the House Financial Services committee on Wednesday.
“If — and I stress that no decision has been made on this — but 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,” he said.
Powell’s mildly dovish additions signaled that officials will consider a 50 basis-point increase at their March 21-22 meeting alongside a 25 basis-point hike, and the bigger move is not the “default,” Evercore ISI’s Krishna Guha and Peter Williams wrote in a note to clients.
“We have some potentially important data coming up,” Powell said, referencing the latest reading on U.S. job openings, released as the testimony began on Wednesday, as well as February’s employment report due Friday and consumer price data scheduled for release March 14.
Vacancies at U.S. employers retreated to 10.8 million in January but remained historically elevated, the Labor Department’s Job Openings and Labor Turnover Survey, or JOLTS, showed. The ratio of openings to unemployed people, a measure Fed officials watch closely to gauge demand for workers, edged down to 1.9 but remained elevated.
“We continue to think the outcome for March is very open and still lean 25, though JOLTS today does not help our case,” Guha and Williams wrote.
Fed officials will update quarterly economic forecasts at this month’s meeting. In December they saw rates peaking around 5.1% this year, according to their median projection. Powell repeated that the economy has been stronger than expected, which means interest rates will likely need to go higher than officials previously anticipated.
Investors upped their bets again Wednesday that the central bank could raise interest rates by 50 basis points when it gathers later this month instead of continuing the quarter-point pace from the previous meeting. They also saw the Fed taking rates to peak near 5.7% this year, up from 5.5% on Monday.
The Fed began aggressively raising interest rates a year ago, bringing the target on its benchmark rate to a range of 4.5% to 4.75% in February, when they moderated the pace of their actions to a quarter-percentage point increase. That followed a half-point hike in December after four straight jumbo-sized 75 basis point moves.
“Slowing down the pace of rate hikes this year is a way for us to see more of those effects as they come in,” Powell said, referring to the impact of lags in the policy tightening already delivered.
However, now that markets are expecting the Fed to return to a half-point move, policymakers may need to see significantly weaker economic data to justify sticking with a more incremental hike, said Gregory Daco, chief economist for EY-Parthenon. “It’s not simply that the window has been reopened to 50 basis point increments, but that is now the starting point,” he said.
For example, a February labor market report showing the economy added more than 250,000 jobs and wage growth of at least 0.4% would likely cement a half-point hike in March and a terminal rate above 5.6%, Daco said. It would take job gains below 150,000 jobs to justify a quarter point hike, he said.
The central bank’s goal is to lessen demand for goods and services to cool price growth, but the U.S. economy has been remarkably resilient to higher rates. Payrolls increased by more than 1 million in the three months through January, and recent consumption and inflation data point to persistent price pressures.
The Fed’s preferred inflation measures unexpectedly accelerated in January and remains way above the central bank’s 2% target. The personal consumption expenditures price index advanced 5.4% from a year earlier and the core metric was up 4.7%, both marking pickups after several months of declines.
“Inflation is coming down but it’s very high,” Powell said. “Some part of the high inflation that we are experiencing is very likely related to a very tight labor market.”
(With assistance from Catarina Saraiva and Erik Wasson.)
