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Fed chairman warns of further rate hikes in report to Senate Banking Committee

by Ana Lopez
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“The eventual level of interest rates will likely be higher than previously expected.”

In its biennial Monetary Policy Report Federal Reserve Chairman Jerome Powell told the Senate Banking Committee on Tuesday that the Fed is “ready to step up the pace of rate hikes” to help inflation return to its target of 2%.

“If all incoming data indicates faster tightening is warranted, we are prepared to step up the pace of rate hikes,” said Powell, who warned of possible additional rate hikes.

Powell said the central bank will continue to take meetings on a meeting-by-meeting basis based on the aggregate of incoming data and implications for growth and inflation prospects. So far, a series of rate hikes starting in 2022 has led to a slight slowdown in inflation, and that remains a concern.

“Continued hikes in policy rates are probably appropriate to be restrictive enough to bring inflation back to 2% over time,” he said.

Data on January employment, consumer spending and manufacturing inflation have partially reversed the declining trends we saw in the data a month ago. Part of this reversal likely reflects the unusually warm weather in January across much of the country.

Still, the size of the reversal along with revisions from the previous quarter suggest that inflationary pressures are higher than expected at a previous FOMC meeting. from a broader perspective, inflation has eased somewhat since the middle of last year, but remains well above the longer-term FOMC target of 2%.

While inflation has been moderating in recent months, the process of bringing inflation back to 2% has a long way to go and is likely to be bumpy. The latest economic data is stronger than expected, suggesting that the eventual interest rate level is likely to be higher than previously expected. If the totality of the data indicated that faster tightening is warranted, we would be willing to step up the pace of rate hikes. —Jerome Powell

With inflation at a level the economy had not seen since the 1980s, the Fed acted last year with a series of increases in the Federal Funds rate last year. The rate was below 1% for a long time from December 2009 to April 2017, and then again from May 4, 2020 to May 23, 2022. Following multiple increases in 2022, the Federal Funds rate currently stands at 4.58%. … and it will probably go higher.

“It’s hard to argue that we tightened too tight. We need to continue to tighten,” Powell said, adding that the economy needs to ease in the labor market to meet the target inflation rate of 2%. “Inflation is extremely high and is hurting the working people of this country badly. We are taking the only measures we have to reduce inflation.”

The Federal Open Market Committee (FOMC) meets towards the end of this month (March 21-22), we can expect another increase. That increase could be 50 basis points or more. Right now, there’s a lot of uncertainty about where rates will be by the end of the year.

The impact on small businesses can be significant. Companies with flexible interest loans have their rates on their small business loans double in a year. Some companies pay more than 10% interest on existing business loans. This reality negatively impacts cash flow and, of course, profitability. Companies looking to make improvements or expand now should seriously examine the cost of capital and determine whether or not to delay their plans.

However, a tight labor market and persistent inflation do not help entrepreneurs either. The Fed is sticking to its inflation target of 2%. Hopefully their course will lead to deflation, but not an outright recession.

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