To help stabilize prices, the governor of the US Federal Reserve has warned that policymakers may hike interest rates more quickly and further than previously anticipated.
Following the statements, US markets plummeted weeks before the Fed’s next interest rates announcement, and the dollar surged.
Many analysts projected a 0.25 percentage point increase.
But, the comments suggest that the bank may become more aggressive.
In reaction to the sharpest price growth in decades, the Fed raised its benchmark rate to more than 4.5% in the previous year, the highest rate since 2007.
In January, inflation – the rate at which prices rise – in the United States was 6.4%.
While this is lower than it was, it is still much higher than the 2% rate considered healthy, and Mr. Powell warned that recent data indicated that progress might be stalling.
He projected that this would push the bank to hike interest rates over the 5% to 5.5% range predicted by officials in December.
Raising borrowing costs is one strategy for lowering the economy’s total price increases.
“The most recent economic figures have come in stronger than expected, meaning that the interest rates would likely be higher than previously anticipated,” Powell testified in Congress on the first two days of economic testimony.
“If the data demonstrate that more tightening is required, we would be willing to speed rate hikes,” he added.
Parliamentarians, particularly those on the left, were outraged by the statements.
They said the moves would do little to address the underlying causes of inflation, such as the Ukraine crisis and supply chain problems, while generating an economic slowdown that would put millions out of work.
Mr. Powell stated that the economy would suffer if the bank did not act.
Prices in the United States grew by 0.5% unexpectedly from December to January, but monthly data on retail sales and hiring were also better than expected.
By raising borrowing costs, Federal Reserve policymakers hope to reduce demand for loans for business expansions, housing, and other purchases, so cooling the economy and alleviating price pressures.
Significant slowdowns in rate-sensitive areas of the economy, notably the housing market, have already occurred due to the steps.
Mr. Powell added that officials would thoroughly review all incoming data before making a decision.
Following the hearing, Capital Economics’ deputy chief US economist Andrew Hunter noted in a note that “the conclusion is that not only are interest rates set to rise faster than we previously projected but there is a lot less room for rate reduction later this year than we had previously believed.”
In early afternoon trade in New York, the Dow Jones Industrial Average was down 1.6%, the S&P 500 was down roughly 1.4%, and the Nasdaq was down about 1%.
US interest rates, inflation remains high
In the United States, inflation has dropped for the seventh month in a row, but prices continue to rise considerably faster than is considered healthy.
Inflation was 6.4% in the year to January, with rises in housing, food, and energy prices driving the figure.
This was a modest reduction from the previous month’s figure of 6.5%.
Officials have warned that price stabilization will take time, despite recent hints of improvement.
Beef prices dropped compared to a year ago. However, egg costs have risen by 70% since January 2021, while butter and margarine have risen by roughly a third.
Televisions, iPhones, and used cars and trucks are all cheaper than a year ago.
Yet, housing costs – one of the price index’s most significant components – have grown by more than 7% due to rising rents, while prices for services such as haircuts continue to rise dramatically.
The Federal Reserve, the US central bank, has promptly raised interest rates to slow the economy and reduce the pressures pushing up prices.
But, the labor market has held up better than expected, sparking heated debate among economists about how high borrowing costs will have to be to bring inflation to the 2% level considered healthy – and whether the economy can sustain the increase without entering a severe recession.
Analysts believe the latest inflation data will keep the Federal Reserve on track to raise interest rates.
Prices surged in the United States in 2021 as the economy recovered from epidemic lockdowns. As a result of the shortage and increased costs, businesses hiked their prices.
The Ukraine war, which disrupted food and energy supplies, aggravated the economy, causing inflation to reach 9.1% in June, the highest level since 1981.
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Their armies have now retreated. Furthermore, recent data suggests that the surge in rental rates, shown in the government’s report at a lag as people renew their leases, is also diminishing, according to analysts.
Despite this, many businesses have continued raising their prices, citing rising costs.
Petrol, often known as gasoline in the US, climbed in January but remained lower than last year’s record highs.