Federal Reserve Chair Warns to Brace for Higher Interest Rate Hikes

What happened

On March 7, Federal Reserve Chair Jerome Powell told the Senate Banking Committee that the central bank is prepared to raise interest rates at a more aggressive pace this year if economic data continues to point to rising inflation. In January, the Consumer Price Index (CPI) showed a 0.5% increase in inflation from December. And if February's CPI data doesn't point to the opposite trend, the Fed may have no choice but to take action.

So what

In 2022, the Federal Reserve raised interest rates seven times in an effort to combat inflation. Four of those rate hikes were 0.75% jumps, which is considered highly aggressive.

In February 2023, the Fed implemented a less aggressive 0.25% rate hike in anticipation of cooling inflation. But the next rate hike that comes through might far surpass the 0.25% mark if the Fed doesn't see a near-term sign that inflation is slowing down.

“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 said. “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.”

All told, the Fed would like to see the annual rate of inflation dip down to around the 2% mark. As of January, it was at 6.4%. That's an improvement from the 9.1% annual inflation reading seen in June. But it's still not where the Fed wants it to be.

Now what

The Fed's 2022 interest rate hikes have already driven up the cost of borrowing. These days, consumers are looking at higher rates for everything from mortgages to auto loans to personal loans.

If the Fed continues to raise interest rates, the cost of borrowing is only likely to increase. That could put a strain on consumers' budgets at a time when inflation is already making it difficult to cover expenses.

Plus, rising interest rates are a dangerous thing for consumers with variable-interest debt, such as those with credit card and HELOC balances. As interest rates rise broadly, these debts could end up costing consumers even more money in the course of the year.

Aggressive interest rates on the part of the Fed in 2023 might also be enough to fuel a major pullback in consumer spending. The Fed wants that to happen so inflation can slow down. But if it happens to too extreme a degree, it could end up spurring a broad economic recession. And that could lead to an uptick in joblessness and the many financial problems that tend to stem from that.