Inflationary pressures running higher than expected: Powell's Senate testimony

Stronger than expected January data "suggest that inflationary pressures are running higher than expected at the time of our previous Federal Open Market Committee meeting," Federal Reserve Chair Jerome Powell said Tuesday in his prepared testimony for the Senate Committee on Banking, Housing & Urban Affairs.

That means the policymakers are open to raising rates higher than they previously expected.

"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"

The central bankers continue to expect ongoing increases in its federal funds rate target range. Meanwhile, the Fed continues the process of shrinking its balance sheet, he said. In Tuesday morning trading, the S&P 500 slipped 0.9%, the Nasdaq -0.9%, and the Dow -0.6%. The 10-year Treasury yield rises almost 4 basis points to 4.00%.

While overall inflation has eased from its peak in June, "there is little sign of disinflation thus far in the category of core services excluding housing, which accounts for more than half of core consumer expenditures," he said.

To bring down inflation in that sector, "there will very likely be some softening in labor market conditions," Powell said.

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On Friday, the Fed released its Semi-Annual Monetary Policy Report, saying inflation remains too high, financial risks are little changed