The Federal Reserve Chairman has warned officials could raise interest rates further and faster than previously expected in a bid to stabilize prices.
US stocks fell and the dollar rose following comments just weeks ahead of another interest rate announcement from the bank.
Many analysts had expected a further increase of 0.25 percentage points.
But the comments suggest the bank could be more aggressive.
Last year the Fed raised interest rates to over 4.5% – the highest rate since 2007 – in response to decades of rapidly rising prices.
Inflation – the rate at which prices are rising – was 6.4% in the US in January.
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While that’s lower than it was, it remains well above the 2% rate considered healthy, and Mr Powell said officials were concerned about the latest data suggesting progress could be stalling.
He said this could push the bank to hike rates above the 5% to 5.5% forecast in December.
Increasing the cost of borrowing is a mechanism to curb inflation in the overall economy.
“Recent economic data is stronger than expected, suggesting that the final rate level is likely to be higher than previously thought,” Mr. Powell told Congress during the first of two days of testimony on the economy.
“If the body of data indicated that faster tightening was warranted, we would be willing to increase the pace of rate hikes,” he added.
The comments sparked some opposition from lawmakers, especially the ones on the left.
They said the moves would do little to address the root causes of the inflation problem — such as the war in Ukraine and supply chain problems — while resulting in an economic slowdown that would put millions of people out of work.
“They are gambling with lives,” said Sen. Elizabeth Warren, a Massachusetts Democrat, who also attributed the inflation problem to corporate price-gouging.
Mr Powell said the economy would be in worse shape if the bank didn’t act.
US prices rose an unexpected 0.5% from December to January, while monthly updates on retail sales and hiring also came in stronger than expected.
By raising the cost of borrowing, Federal Reserve officials hope to reduce demand for credit for business expansion, homes and other purchases, ultimately cooling the economy and relieving the pressures that are pushing up prices.
The moves have already led to a sharp slowdown in interest-rate-sensitive areas of the economy, such as the real estate market.
Mr Powell said officials would carefully review incoming data when making their decision.
“The result is that not only will interest rates rise higher than we previously expected, but there is much less scope for rate cuts later this year than we initially thought,” wrote Andrew Hunter, US deputy chief economist for Capital Economics in a note following the testimony.
In early afternoon trading in New York, the Dow Jones Industrial Average was down 1.6%, while the S&P 500 was down about 1.4% and the Nasdaq was down about 1%.
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