Fed Chair Jerome Powell Sees 'Bumpy' Inflationary Road Ahead: Markets Tip Toward 0.5% March Rate Increase

The SPDR S&P 500 SPY is sliding Tuesday morning in the wake of the Federal Reserve's semiannual Monetary Policy Report, which appears to show the central bank has taken an incrementally more hawkish stance.

Powell's Economic Observations: Fed Chair Jerome Powell reiterated the committee's goal of getting inflation back down to 2%. Powell also acknowledged the committee is aware that continued high inflation is causing significant hardships.

"We have covered a lot of ground, and the full effects of our tightening so far are yet to be felt. Even so, we have more work to do," Powell said in a Tuesday statement to the  Senate Committee on Banking, Housing, and Urban Affairs.

Recent data is moving in the wrong direction, the Fed chair noted, adding that inflationary pressures are running higher than previously expected at the Fed's last meeting.

Powell also highlighted a lack of disinflation signs in core services excluding housing. 

"To restore price stability, we will need to see lower inflation in this sector, and there will very likely be some softening in labor market condition," Powell said, suggesting the central bank will be more aggressive in the fight against historically high inflation.

Monetary Policy Response: The Fed maintained its stance that ongoing increases in the target range for the federal funds rate will be appropriate. The Fed also plans to continue to significantly reduce the size of its balance sheet.

"We will continue to make our decisions meeting by meeting, taking into account the totality of incoming data and their implications for the outlook for economic activity and inflation," Powell said.

The Fed Chair added that getting inflation back down to 2% is likely to be "bumpy" and said the process still has "a long way to go." Recent data suggests the ultimate level of interest rates will be higher than the committee previously anticipated. 

The Fed raised rates by 0.25% in its last meeting and the market had been pricing in a subsequent 0.25% hike, but recent data has changed sentiment and the market is currently projecting a 54.3% chance of a 0.5% rate hike at the Fed's next meeting later this month, per CME Group data.

"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," Powell said.

"The historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done."

Congress Presses Powell: Market expectations for a 0.5% hike continued to rise as lawmakers questioned the Fed chair following the semiannual monetary policy report. 

Sen. John Kennedy (R-Louisiana) went back and forth with Powell on the committee's goals. 

Kennedy said: "When you're slowing the economy, you're trying to put people out of work. That's your job, is it not?"

Powell said "not really" and clarified that the committee's goals are to restore price stability. Instead of "trying to raise the unemployment rate," the Fed is trying to realign supply and demand, he said.

The two did agree however that "recessions and downturns" have historically followed Fed attempts to reduce inflation. 

Sen. Jack Reed (D-Rhode Island) tried to pinpoint what exactly is causing sticky inflation. When he asked Powell to explain what the committee is seeing, the Fed chair rehashed concerns from his report, noting that core inflation, excluding housing, continues to show a lack of disinflation. 

Goods inflation continues to fall, housing services are expected to show signs of falling in the next six to 12 months, but the rest of the services sector "is the source of the inflation we have now," Powell said. 

When Reed asked Powell if there is any way the Fed can target the services area without impacting other areas, he said: "Not really. Our monetary policy tools are famously powerful, but blunt." 

SPY Price Action: The SPY is down 0.67% at $401.85 at the time of publication, according to Benzinga Pro.

Photo: courtesy of the Federal Reserve.