Federal Reserve Chairman Jerome Powell cautioned that interest rates will likely head higher than central bank policymakers had expected. Citing data earlier this year showing that inflation has reversed the deceleration showed in late 2022, the central bank leader warned of tighter monetary policy ahead to slow a growing economy.

“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. “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. 

Those remarks carry two implications: one, that the peak— or terminal— level of the federal funds rate will likely stand higher than the previous indication from the Fed officials, and two, that the switch last month to a fraction of the quarter-percentage point increase will not stay for long if inflation data continues to run hot. In their December estimate, officials pegged the terminal rate at 5.1%. Current market pricing moved higher following Powell’s remarks to a range of 5.5%-5.75%, according to CME Group data. Powell did not specify how high he thinks rates ultimately will reach.

The speech comes with markets generally optimistic that the central bank can tame inflation without running the economy into a ditch. Stocks fell sharply while Treasury yields jumped after Powell’s remarks were released. January data shows that inflation as gauged by personal consumption expenditures prices — the preferred metric for policymakers — still ran at a 5.4% pace annually. This stands well above the Fed’s 2% long-run target and a shade above the December level. Powell said the current trend shows that the Fed’s inflation-fighting job is not over, though he noted that some of the hot January inflation data could be the product of unseasonably warm weather.

“It feels like inflation gets worse and worse every day and nobody is taking action. Gas prices haven’t dropped to what they were a few years ago and I just wonder when it will end. I feel like what Powell is doing is more effective than other recent solutions,” junior Aaron Wilson said.

The chairman faced some pushback from Democrats on the Senate panel who blamed inflation on corporate greed and price gouging and said the Fed should reconsider its rate hikes. Senator Elizabeth Warren, a frequent Powell critic, charged that the Fed’s inflation goals will put two million people out of work. The Fed has raised its benchmark fund rate eight times over the past year to its current targeted level between 4.5%-4.75%. On its face, the fund’s rate sets what banks charge each other for overnight lending. But it feeds through to a multitude of other consumer debt products such as mortgages, auto loans and credit cards.

Powell noted some progress on inflation for areas such as housing. However, he also noted “there is little sign of disinflation” when it comes to the important category of services spending excluding housing, food and energy. That is an important qualifier considering that the chairman at his post-meeting news conference in early February said the disinflationary process had begun in the economy, remarks that helped send stocks higher.