Federal Reserve Chair Jerome Powell is expected to head to Capitol Hill this week and suggest that interest rates will go higher than policymakers anticipated just a few weeks ago if economic data continues to come in strong. Powell's hawkish tone will likely prompt pushback from progressives who are warning the Fed not to inflict undue pain on the labor market, which has been a bright spot for President Biden and Democrats. Meanwhile, Republican lawmakers may cheer the Fed's actions as they keep the focus on the persistent inflation that has kept Biden's approval ratings low.
The Fed officials argue that to sustain labor-market strength over the long term, they need to get inflation back to the central bank's 2% target from the current 5.4% pace. Powell's semiannual two-day testimony will be closely watched as it will likely be his last public remarks before the Federal Open Market Committee next meets in March. US central bankers have rapidly raised interest rates to a target range of 4.5% to 4.75% in February, starting from near-zero levels a year ago. However, Fed officials have made it clear that they have more work to do after a string of reports in recent weeks pointed to a potential re-acceleration in the economy.
Investors are fully pricing in a 25 basis-point rate increase this month, with a 25% chance that the central bank lifts rates by 50 basis points, according to the pricing of futures contracts. Policymakers will have a few more pivotal reports on hand, including the February jobs report and a fresh reading on consumer prices, to help shape their projections. If the payroll and inflation data cool after January's hot prints, then Fed Governor Christopher Waller indicated he would support raising the central bank's target rate "a couple more times." But if the data reports continue to come in strong, Waller said the policy target range will have to be raised even more to ensure that the momentum is not lost.
More Democrats are likely to take up Senator Elizabeth Warren's message that Powell is risking the best labor market in five decades by pushing rates ever higher. There is growing concern among Democrats about what rate hikes mean for the labor market as they head into another election cycle and fears that the Fed could do too much.
