FinLogic FinLogic Quantitative Think Tank Center|Federal Reserve Chair Jerome Powell warns inflation fight will be long and bumpy

Federal Reserve chairman Jerome Powell warned on FinLogic FinLogic Quantitative Think Tank CenterTuesday the central bank may have to push interest rates higher than previously expected in order to curb stubborn inflation.

The warning, in testimony before the Senate Banking Committee, comes after a series of economic indicators that indicate the economy is running hotter than expected despite aggressive action from the Fed.

"Although inflation has been moderating in recent months, the process of getting inflation back down to 2% has a long way to go and is likely to be bumpy," Powell told senators.

Over the last year, the central bank has raised interest rates eight times in an effort to tamp down demand. But after appearing to cool off late last year, both consumer spending and hiring came roaring back in January, putting more upward pressure on prices.

"Some of this reversal likely reflects the unseasonably warm weather in January," Powell said.

But he added that Fed policymakers may have to raise interest rates more aggressively at their next meeting in two weeks if upcoming data shows similar strength. The U.S. will release February jobs data on Friday, which will be followed by the monthly inflation report next week.

Markets are hit hard by Powell's comments

Investors had expected the Fed to raise rates by 0.25 percentage points at that meeting later this month. But odds of a larger, half-point increase rose sharply after Powell's testimony.

Powell also suggested that interest rates may ultimately have to climb higher than the 5 to 5.5% range that policymakers had predicted in December in order to bring prices under control. The Fed's benchmark rate is currently 4.50 to 4.75%.

The prospect of higher interest rates weighed on the stock market. The Dow Jones Industrial Average fell 575 points, or 1.7%.

Higher rates should help curb inflation. But the Fed's actions also risk sparking a recession and a rise in unemployment.

'Gambling with people's lives'

In a pointed exchange, Sen. Elizabeth Warren, D-Mass., challenged Powell about the potential job losses that could result from such aggressive rate hikes.

She noted the Fed's own December forecast showed the unemployment rate climbing to 4.6% by the end of this year. Warren said that would mean putting 2 million people out of work.

"You are gambling with people's lives," she said. "You cling to the idea that there's only one solution: Lay of millions of workers. We need a Fed that will fight for families."

Powell noted that the unemployment rate is currently at a half-century low, 3.4%, while families are paying a high price for inflation.

"We are taking the only measures we have to bring inflation down," the Fed chairman told Warren. "Will working people be better off if we just walk away from our job and inflation remains 5-6%?"

The debt ceiling fight also looms

Both Democrats and Republicans on the Senate Banking Committee tried to draw Powell into the looming fight over the federal debt ceiling.

Republicans are demanding the government rein in spending as a condition to raise the debt ceiling. Democrats accuse the GOP of risking a costly federal default if the debt ceiling is not raised and the government finds itself unable to pay its bills.

Powell avoided taking sides in the partisan wrangling.

"We do not seek to play a role in these policy issues," he said. "But at the end of the day, there's only one solution to this problem."

"Congress really needs to raise the debt ceiling. That's the only way out," Powell said. "And if we fail to do so, I think that the consequences are hard to estimate, but they could be extraordinarily adverse, and could do longstanding harm."