Fed Chair Jerome Powell Returns to Congress for Second Day of Testimony

The Fed chief’s appearance Wednesday morning before the House Financial Services Committee offered his final scheduled opportunity to shape expectations ahead of the March 21-22 rate-setting meeting.

His comments Tuesday laid the groundwork for a notable shift in tactics to reduce price pressures. He said hotter inflation and hiring could lead central bank officials to alter their recently adopted strategy of raising rates in smaller quarter-point increments.

“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,” Mr. Powell told 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.”

Fed officials slowed their pace of rate rises last month when they increased the fed-funds rate by a quarter-point to a range between 4.5% and 4.75%. That followed increases of a larger half-point, or 50 basis points, in December and 0.75-point in November and at three previous meetings.

Officials said last month that moving in smaller steps would better allow them to assess the effects of last year’s rapid increases and reduce the risk of raising rates too much. 

The size of their next rate rise will also be influenced by government reports coming Friday on February hiring and next week on inflation, Mr. Powell said. 

Since Fed officials last met on Feb. 1, several economic reports have revealed hiring, spending and inflation were stronger in January than expected. More important, data revisions showed inflation and labor demand didn’t soften as much as initially reported late last year.

“We’re looking at a reversal, really, of what we thought we were seeing to some extent,” said Mr. Powell. Last month, he said moving more slowly would better ensure the Fed didn’t raise rates too much. On Tuesday, he said, “nothing about the data suggests to me that we’ve tightened too much.”

Some of the recent upswing could reflect unusually warm January weather that can interfere with seasonal adjustments to economic data, Mr. Powell said. But the breadth of the reversal, together with revisions to previous data, “suggests that inflationary pressures are running higher than expected at the time of our previous [rate-setting] meeting,” he added.

Employers added 517,000 jobs in January, a surge that shocked economists who were anticipating hiring to slow. Inflation’s decline late last year stalled in January. The 12-month inflation rate, excluding volatile food and energy items, was 4.7%, up from 4.6% in December, as measured by the Commerce Department’s personal-consumption expenditures price index.

The Fed has been trying to curb investment, spending and hiring by raising rates, which makes it more expensive to borrow and can push down the price of assets such as stocks and real estate. The fed-funds rate influences other borrowing costs throughout the economy.

The recent strong economic data ended an unusual disconnect between investors and the Fed over the most likely path for rates. When officials last met, investors in interest-rate futures markets anticipated the Fed would raise the fed-funds rate just once more this year, to a peak of 4.9%, and begin cutting it this fall. Before Tuesday’s hearing, investors anticipated the rate would rise to around 5.5% by midyear and remain there through the end of 2023, according to CME Group.

Those expectations rose again during the hearing. By the end of Mr. Powell’s testimony, investors anticipated the fed-funds rate would rise to between 5.5% and 5.75% this year. The probability of a half-point hike this month rose to around two-in-three, from one-in-three before the hearing.

Write to Nick Timiraos at Nick.Timiraos@wsj.com