Fed's Powell tells Senate 50bp rate hikes possible - if needed

The head of the Federal Reserve kept the door open to larger rate hikes - if needed - while pointing out that recent economic data had been stronger than expected.

In remarks prepared for his speech before the US Senate's Banking Committee, Jerome Powell, conceded that warmer weather had played a hand in recent stronger readings for employment, consumption and inflation.

"Still, the breadth of the reversal along with revisions to the previous quarter suggests that inflationary pressures are running higher than expected at the time of our previous Federal Open Market Committee (FOMC) meeting," he added.

On inflation, core goods prices had fallen, and those for housing services looked set to decelerate over 2023.

But core services inflation, excluding housing, was showing few signs of disinflation.

That was key as that component accounted for over half of core consumer expenditures, he explained.

He also highlighted how salary growth in nominal terms had slowed somewhat in recent months, but said that increases remained above the pace consistent with 2% inflation.

So too, labour supply had continued to lag "very strong" hiring, Powell said.

The number of job openings per unemployed person was still close to the all-time high hit last March, he said, while unemployment insurance claims remained near historical lows.

"We will continue to make our decisions meeting by meeting, taking into account the totality of incoming data and their implications for the outlook for economic activity and inflation.

"We will continue to make our decisions meeting by meeting, taking into account the totality of incoming data and their implications for the outlook for economic activity and inflation."

"Fed Chair Jerome Powell appears to have confirmed today that interest rates are set to rise a higher than we previously anticipated," said Andrew Hunter, deputy chief US economist at Capital Economics.

"But with most evidence still pointing to economic weakness and lower inflation this year, we still suspect the Fed will begin cutting rates again sooner than the markets are now expecting."

For their part, the day before economists at Citi had told clients: "The data on hiking cycle accelerations is limited and a Fed acceleration is not our base case.

"Of the 4 events of acceleration, two marked an abrupt end to the hiking cycle, even though the rhetoric remained hawkish at the time. Broadly, the dollar strengthens into and after the acceleration and equities are lower. 10Y rates are surprisingly contained and could rally if the acceleration ends up being the last hike."