The Federal Reserve could increase the size of its interest rate hikes and raise borrowing costs to higher levels than previously projected if evidence continues to point to a robust economy and persistently high inflation, Chair Jerome Powell says in prepared testimony to a Senate panel.

“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 says in the testimony to the Senate Banking Committee. “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.”

The Fed raised its benchmark rate by a quarter-point in early February after imposing a half-point increase in December and four three-quarter-point hikes before that. Over the past year, the central bank has raised its key rate, which affects many consumer and business loans, eight times.

Most economists and Wall Street investors had expected the Fed to carry out another quarter-point increase when it next meets March 21-22. But in recent days, traders have been pricing in a greater likelihood of a half-point increase, according to futures markets. Powell’s comments suggest a half-point increase in March is possible.

In his prepared remarks Tuesday, Powell walks back some of the optimistic comments about declining inflation he had made after the Fed’s Feb. 1 meeting, when he noted that “the disinflationary process has started” and he referred to “disinflation” — a broad and steady slowdown in inflation — multiple times. At that time, year-over-year consumer price growth had slowed for six straight months.

But after that meeting, the latest reading of the Fed’s preferred inflation measure showed that consumer prices rose from December to January by the most in seven months. And reports on hiring, consumer spending and the broader economy have also indicated that growth remains healthy.

Such economic figures, Powell said Tuesday, “have partly reversed the softening trends that we had seen in the data just a month ago.”
…