Fed May Raise Rates Even Higher - Powell

The United States is prepared to increase the pace of interest rate hikes if strong economic data persists, and could raise them higher than previously anticipated, Federal Reserve Chair Jerome Powell said on Tuesday.

An "unseasonably warm" January across much of the country was likely behind the the robust employment, consumer spending, manufacturing and inflation figures, which pointed to a partial reversal of earlier softening trends, 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," he said.

The US central bank has already raised its benchmark lending rate eight times since early last year, as it contends with inflation that remains stubbornly above its long-term target of 2 percent.

The Fed raised rates last month by a quarter percentage point to between 4.5 and 4.75 percent, its highest level since the global financial crisis.

US stocks fell following Powell's remarks, with the S&P 500 index down around one percent just after midday local time.

Stocks spent much of February in the red as Treasury yields climbed amid worries of more aggressive Fed actions to counter inflation.

The dollar strengthened sharply against the euro and other major currencies following Powell's comments.

Powell's comments raise the likelihood of the Fed raising rates by 50 percentage points at its next meeting on March 21-22, Evercore ISI economists Krishna Guha and Peter Williams wrote in a note to investors.

"We must accept that this option appears to be somewhat more live than we had previously believed," they said, while suggesting a quarter percentage point hike was still the more likely option.

Markets are now roughly evenly split on the chances of a larger half percentage point hike, according to Joe Manimbo, senior market analyst at Convera.

Despite its forceful moves, the Fed's favoured inflation measure, personal consumption expenditure, rose slightly to reach an annual rate of 5.4 percent in January.

Core PCE inflation, which excludes volatile energy and food prices, also rose to an annual 4.7 percent.

At the same time, the labour market remains "extremely tight," with close to two jobs available for every one unemployed person in December, Powell said.

US job creation surged in January, with employers creating more half a million new jobs and driving the unemployment rate to its lowest level since the 1960s. (AFP)