Fed’s Powell says one or two more rate hikes might be needed in 2023

Federal Reserve Chair Jerome Powell said returning U.S. inflation to 2% is crucial to support the long-term health of the U.S. economy, and that more interest-rate increases might be needed this year.

Policymakers feel “it will be appropriate to raise rates again this year, and perhaps twice,” if the economy performs about as expected, even as they’ve been hiked to an appropriately restrictive level, Powell told the Senate Banking Committee on Thursday.

The Fed chair said it is working families who suffer most directly and quickly from high inflation.

“It is for the benefit of those people and all other people that we need to restore 2% inflation in this country on a sustained basis,” he said. “We are committed to getting inflation under control and a strong majority of the committee feels that we’re close, but there’s a little further to go with rate hikes.”

Two-year treasuries declined further as he spoke, while the dollar gained against a basket of currencies.

Powell was on Capitol Hill for a second day, presenting the Fed’s semiannual economic update to Congress. He repeated the message he shared with the House on Wednesday that the central bank was laser-focused on reducing elevated inflation back to target despite Democrat lawmakers’ concerns that tighter credit will push up unemployment.

Fed officials held rates steady last week after 10 straight increases, giving themselves more time to evaluate how the economy is responding to recent banking stress and higher borrowing costs.

The move left the Fed’s benchmark rate steady in a range of 5% to 5.25%. But fresh economic projections released at the meeting show policymakers see interest rates rising by another 50 basis points this year, according to the median forecast.

“We don’t want to do more than we have to, but we do think—overwhelmingly, people on the committee do think—that there are more rate hikes coming, but we want to make them at a pace that allows us to see incoming information so we make good decisions,” Powell said.

Fed Governor Michelle Bowman reinforced Powell’s hawkish remarks earlier Thursday, telling a Fed Listens event in Cleveland that “additional policy-rate increases will be necessary” to curb inflation that is still unacceptably high.

Though the median estimate of policymakers’ forecasts shows at least a few rate cuts next year, Powell emphasized that won’t happen anytime soon.

“The test for that is that we’re confident that inflation is moving back down to our 2% goal,” Powell said. “But that’s going to depend on how the economy performs, and inflation is just consistently proven more persistent than we’ve expected.”

Powell said Wall Street’s biggest banks will bare the brunt of U.S. regulators’ moves to raise capital requirements for lenders, and that they could face an increase of about 20% in what they have to set aside.

The long-awaited changes are part of an international overhaul of capital rules that started more than a decade ago in response to the financial crisis of 2008. The issue became more stark—and political—this year with the collapse of several banks in the U.S.

Powell, in response to repeated questions from lawmakers, said community banks likely wouldn’t be impacted by increased regulatory requirements, which would mostly focus on lenders with more than $100 billion in assets.

Senator Thom Tillis, a Republican from North Carolina, asked Powell about the collapse of Silicon Valley Bank and who ultimately bore the responsibility for supervisory failures there. Powell said that while rules weren’t broken, regulators weren’t forceful enough with SVB.

“In public service, people—if they engage in malfeasance, if they conduct criminal behavior, if they break rules and things like that—they get fired. Nothing like that happened here,” Powell said. “The San Francisco Fed, they had identified the issues, they had notified the management team, it just wasn’t forceful enough, and that’s a problem with our system.”