Federal Reserve chair Jay Powell has warned that the US central bank might have to raise interest rates more than expected by investors because it will probably take a “significant period of time” to tame inflation given stronger labour market data.

Powell’s comments to the Economic Club of Washington on Tuesday were his first since data last week showed a surprising jump in jobs growth in January, which suggested the Fed might have to go further in its monetary tightening to cool down the economy.

But even as Powell stressed that the central bank was prepared to be more aggressive if needed, his intervention was not as hawkish as expected by some economists and market strategists.

“The markets were geared up for a hawkish speech, based on the unemployment number on Friday. Markets expected that the whole world had changed, and it doesn’t seem like it has,” said Andy Brenner, head of international fixed income at NatAlliance Securities.

Michael Feroli, a senior economist at JPMorgan, added: “While Powell has recently questioned the market’s more benign inflation forecast, he hasn’t protested it too strongly — after all, doing so would be asserting with vigour that the Fed will miss its inflation target.”

Powell’s intervention resulted in choppy trading. The S&P 500 and Nasdaq were up 0.8 per cent and 1.1 per cent, respectively, in afternoon trading.

In less than a year, the Fed has lifted its main interest rate from near-zero to a target range between 4.5 per cent and 4.75 per cent. Last week, it slowed the pace of its rate increases to 25 basis points from 50 at the end of last year, suggesting its most aggressive efforts to tame inflation were behind it.

On Tuesday, answering questions from David Rubenstein, the co-founder of private equity group Carlyle, Powell said the “disinflationary process” still had a “long way to go” and was in its early stages. “It’s probably going to be bumpy,” he said.

“The reality is we’re going to react to the data,” Powell said, adding that “it may well be the case” that the Fed would have to raise rates “more than is priced in” by financial markets.

The Fed chair later reiterated that message. “I think there has been an expectation that [inflation] will go away quickly and painlessly and I don’t think that’s at all guaranteed. That’s not the base case,” Powell said. “The base case, for me, is that it will take some time. And we will have to do more rate increases and then we’ll have to look around and see whether we’ve done enough.”

Edward Al-Hussainy, senior analyst at Columbia Threadneedle, said: “Nothing in Powell’s interview deviated from the message in [the] post-FOMC press conference, about whether the labour market report has meaningfully changed the odds of the terminal [rate] moving higher.”

In recent days, other Fed officials have also pointed to the enduring strength of the labour market as a reason for the central bank to keep pressing ahead with tightening.

“It’ll probably mean we have to do a little more work,” Raphael Bostic, the president of the Atlanta Fed, told Bloomberg News. “And I would expect that would translate into us raising interest rates more than I have projected right now.”

Two senior European Central Bank policymakers on Tuesday also pushed back against the idea that it could soon stop raising interest rates. Isabel Schnabel, an ECB executive board member, said it “can’t yet give the all clear on inflation” because underlying price pressures — excluding volatile energy and food prices — are “still extraordinarily high”. 

Schnabel told a Finanzwende webinar that “monetary tightening is having little impact so far” on inflation and the recent deceleration of price growth in the eurozone purely reflected a fall in energy inflation. Her comments appeared designed to counter investor hopes that the ECB could pause after its meeting next month, when it has signalled plans to raise rates by another half percentage point.

Germany’s central bank boss Joachim Nagel, who is a member of the ECB rate-setting governing council, told Börsen-Zeitung that “further, significant rate hikes” were still needed because even after it raised its deposit rate to 2.5 per cent last week, this did not yet seem “restrictive” to him.