Fed stresses ongoing interest rate hikes needed in monetary report to Congress

The Federal Reserve underscored Friday in a semiannual Monetary Policy Report to Congress that inflation remains too high and that ongoing increases in interest rates are needed to bring inflation back down to the Fed’s 2% target.

“The Federal Reserve is acutely aware that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials,” the report reads.

Fed Chair Jerome Powell will testify on this report and monetary policy generally in his semi-annual testimony to Congress next Tuesday before the Senate Banking Committee and Wednesday before the House Financial Services Committee.

In those sessions, he is expected to be hit hard on questions on inflation and further rate hikes. It will be Powell’s first testimony since Republicans took control of the House.

In a mostly backward-looking report, the Fed reiterated that bringing down inflation will likely require a period of below-trend growth and softening in the job market. Officials noted that the job market remains very strong and that it will have to weaken to bring down inflation in the services sector, which remains high.

The report also noted that market functioning remains orderly but that market liquidity remained low in several key areas, including the Treasury market, compared with pre-pandemic levels. The Fed said it is prepared to adjust the winding down of its balance sheet should economic or financial change to require it.

The Fed also noted that financial conditions have tightened significantly since last June but that valuations in the stock market remained notable and ticked up, on net, as stock prices increased moderately even as earnings expectations declined.

The report also said that because of high interest rates to bring down inflation the Fed’s interest expenses rose considerably, and, as a result, net income turned negative.

The central bank has raised the federal funds rate to between 4.5% and 4.75% in a series of hikes dating back to last year.

Powell’s testimony next week will be his last comments before the central bank’s next policy meeting on March 21-22, where officials are still largely expected to raise their benchmark interest rate by a quarter percentage point. They will offer new interest rate projections, as inflation gauges have of late shown more signs of stickiness in the U.S. economy.