GBP/USD Fed Chair Jerome Powell

Fed Chair Jerome Powell acknowledged that the pace of quarter-point interest-rate increases is not set in stone, and a faster tightening of rates may be warranted if economic data indicates it is necessary.

Powell’s follow-up testimony tomorrow will be his last scheduled public remarks on interest-rate policy before the Fed’s next meeting, March 21-22.

Strong economic data have shifted investors rate expectations, with the rate now expected to rise to around 5.5% by midyear and remain there through the end of 2023.

Federal Reserve Chair Jerome Powell acknowledged during his Capitol Hill hearings that the recent 25bps pace of interest rate increases is not set in stone. Powell expressed his belief that strong and sustained economic activity this year could prompt the central bank officials to accelerate interest rate increases. He further stated that this could lead to more rate increases than initially expected to combat high inflation.

Since the Fed’s last meeting in February, several economic reports have revealed that hiring, spending, and inflation were hotter than anticipated. Data revisions also revealed that inflation and demand for labor did not slow as much as initially reported. Powell explained that the breadth of the reversal, along with revisions to the previous quarter, suggests that inflationary pressures are higher than initially expected.

Several Fed officials have indicated in recent weeks that they could raise rates this year more than initially projected. Three regional Fed bank presidents have said they could have backed a larger half-point increase last month or would do so at the coming meeting.

The recent strong economic data shifted investors rate expectations. When the Fed last met, investors in interest-rate futures markets anticipated officials would raise the fed-funds rate just once more this year, to a peak of 4.9%, and begin cutting it this fall.

According to CME’s Fed Watch tool, investors are now pricing in a 60/40 shot of a 50bps rate hike in two weeks’ time and that rates could peak above 5.5%.