Fed Chair Powell says interest rates are ‘likely to be higher’ than previously anticipated

Federal Reserve Chairman Jerome Powell on Tuesday cautioned that interest rates are likely to head higher than central bank policymakers had expected.

Citing data earlier this year showing that inflation has reversed the deceleration it showed in late 2022, the central bank leader warned of tighter monetary policy ahead.

“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 in remarks prepared for two appearances this week on Capitol Hill. “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.”

Those remarks carry two implications: One, that the peak, or terminal, level of the federal funds rate is likely to be higher than the previous indication from the Fed officials, and, two, that the switch last month to a smaller quarter-percentage point increase could be short-lived if inflation data continue to run hot.

In their December estimate, officials pegged the terminal rate at 5.1%. Current market pricing is a bit higher than that, in the 5.25%-5.5% area, according to CME Group data. Powell did not specify how high he thinks rates ultimately will go.

The speech comes with markets generally optimistic that the central bank can tame inflation without running the economy into a ditch.

However, January data shows that inflation as gauged by personal consumption expenditures prices — the preferred metric for policymakers — was still running at a 5.4% pace annually. That’s well above the Fed’s 2% long-run target and a shade above the December level.

Powell said the current trend shows that the Fed’s inflation-fighting job is not over.

“We have covered a lot of ground, and…