Federal Reserve Chair Jerome Powell said Tuesday the U.S. economy is advancing at a faster pace than expected, which could prompt central bank policy makers to raise interest rates at a faster pace than originally planned to curb spending and borrowing in hopes of reining in the continuing increase in consumer prices.
Policy makers at the central bank had signaled their intent to increase its benchmark interest rate by a quarter of a percentage point at upcoming meetings over several months. But Powell told the Senate Banking Committee that may not be enough to curb the U.S. inflation rate, which rose 6.4% over the 12 months ending in January, about three times the 2% pace the Fed considers acceptable.
“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,” Powell said. “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”
The Fed raised its benchmark interest rate, which affects borrowing costs for both businesses and consumers, by a quarter-point to a range between 4.5% and 4.75% last month, easing the pace of rate boosts following increases of a half percentage point in December and 0.75% in November.
The Fed had projected increasing the rate to between 5% and 5.5% and keeping it there until 2024, but the faster economic growth could alter those plans and push policy makers to increase the benchmark rate even higher.
“We will continue to make our decisions meeting by meeting,” Powell said. “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.”
Some U.S. economists have continued to predict that the economy, the world’s largest, will dip into a recession in the coming months, but that has yet to occur. Employers continue to add hundreds of thousands of new workers to their payrolls month after month — 517,000 in January alone — and the national unemployment rate is 3.4%, a 53-year low.
A report for hiring in February is due out Friday.
Fed policy makers last met February 1, but economic data revisions since then showed consumer price increases and the demand for more workers late last year didn’t slow as much as first reported.
A robust labor market is usually favorable for workers looking for higher pay and hundreds of thousands of U.S. workers have switched jobs for bigger salaries as the country continues to recover from the 2020 coronavirus pandemic.
Powell told lawmakers that “strong wage growth is good for workers but only if it is not eroded by inflation.”
“We have more work to do,” he said. “Our policy actions are guided by our dual mandate to promote maximum employment and stable prices. Without price stability, the economy does not work for anyone.”