Fed rate rises and government spending seen at loggerheads

Rising labor overheads

"Labor costs increased 5.3 percent over the past year. But prices rose 7.1 percent. The real purchasing power of American workers continues to drop. This is absolutely not the time for more interest rate hikes that make it even harder for working people to keep the lights on. Hello?"

Wharton School Professor Jeremy Siegel told CNBC on Friday: "I think the Fed is making a terrible mistake.… Inflation is basically over despite the way Powell characterizes it."

But recent signs of inflation ebbing do not mean that the battle has been won, the Chairman of the Federal Reserve Jerome Powell said on Wednesday.

He spoke after the Fed's policy-setting committee raised its benchmark overnight interest rate by half a percentage point and projected it would rise above 5 percent next year, the highest level since a steep economic downturn in 2007.

The rate rise on Wednesday, which was approved unanimously by the Federal Open Market Committee, lifted the target policy rate to the 4.25-4.5 percent range.

"The largest amount of pain, the worst pain, would come from a failure to raise rates high enough and from us allowing inflation to become entrenched," Powell said.

"The inflation data received so far in October and November show a welcome reduction in the pace of price increases, but it will take substantially more evidence to give confidence inflation is on a sustained downward path."

A US Labor Department report on Tuesday said consumer prices rose 7.1 percent on an annual basis in November, while the core rate, which excludes volatile food and energy prices, rose 6 percent. Inflation reached 9.1 percent in June, a four-decade high.

Powell was also asked whether the Fed may consider raising its 2 percent inflation target.

"We're not going to consider that. Under any circumstances," Powell said. "We're going to keep our inflation target at 2 percent," he said, although "there may be a longer-run project" that could review that target.

On Wednesday the economist and financial commentator Peter Schiff said: "If the Fed raised its inflation target up to 3 percent it would lose all remaining credibility. If it gives up on 2 percent because it becomes too painful to maintain, it will likely do the same thing with 3 percent once that rate becomes too painful to maintain. The target becomes meaningless.

Powell had said "the worst pain for Americans would result if the Fed failed to act and let inflation run out of control", Schiff said. "Inflation is already out of control, and the time for the Fed to have acted to prevent it without triggering a severe financial crisis has long since (passed)."

Agencies contributed to this story.

HENG WEILI in New York