The Federal Reserve will likely need to raise interest rates more than expected in response to recent strong data and is prepared to move in larger steps if the "totality" of incoming information suggests tougher measures are needed to control inflation, Fed Chair Jerome Powell told US lawmakers on Tuesday.

"The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated," Powell said in prepared remarks for a hearing before the Senate Banking Committee.

The remarks were his first since inflation unexpectedly jumped in January and the U.S. government reported an unusually large increase in payroll jobs for that month.

Market reaction

STOCKS:

S&P 500 lost 35.76 points, or 0.88%, to 4,012.66, from around flat just before Powell's remarks were released BONDS: U.S. Treasury 10-year note after the remarks, and was last off 4/32 with a yield of 3.999%, up from just before the remarks and from 3.983% late on Thursday FOREX: The euro extended a loss and was off about 0.8% and the dollar index rose

"Clearly the stock and bond markets are reacting to Powell's talking points and specifically the idea that interest rates are likely to be higher than previously anticipated. Powell is explicitly talking about a higher target for interest rates. This is something that the market has been talking about but obviously hasn't been fully priced in," says Chris Zaccarelli, Chief Investment Officer, Independent Advisor Alliance, Charlotte, NC.

"The idea that rates are going to be higher for longer is going to be a headwind for stocks and bonds ... a lot of people have been expecting this would be the case but hearing it directly from Powell is a little different to inferring it from the data."

"Six per cent (terminal rate) would be a little higher than it is likely. Probably they will settle in the five and a half to five and three quarter range." "A 50 bps hike in the next meeting is possible, but it is going to be dependent on the payrolls not slowing down and CPI numbers showing that the disinflation progress we've made is stalling. " Michael Brown, Market Analyst, TraderX, London.

"A surprisingly hawkish statement from Fed Chair Powell this afternoon, putting the option of a 50 bps hike on the table for March, while also showing disappointment about the lack of progress made on inflation thus far."

"This serves to markets as another reminder that the Fed are resolute in their desire to tighten financial conditions, and keep them tight. Unsurprisingly, the dollar has gained, and both bonds and stocks lurched lower,"

"Despite the hawkish repricing, Powell again noted that the peak rate is likely to be higher than expected, putting bond bears and dollar bulls back in the driving seat, with a hot NFP print on Friday likely to see calls for a 6% terminal rate increase."

ROBERT PAVLIK, SENIOR PORTFOLIO MANAGER, DAKOTA WEALTH, FAIRFIELD, CONNECTICUT

"The focus of the Fed is trying to get inflation down to 2%. Powell's reiterating what we already know, but he's not saying anything that's dovish, and the market is feeling a bit nervous about the Fed's next move- how many rate hikes are coming and how long are they going to keep rates up."

"I prefer just one more 25 basis point rate hike, but probably we're going to get three 25 basis point rate hikes."

"They just sort of reiterate that the economy is slowing, price stability is difficult to achieve. Inflation is sticky and not moving in the correct direction and the Fed is going to continue with their policy of raising rates, so it's just what the market doesn't want."

"I don't think it makes anybody feel that a recession is going to be more dramatic or deeper than what they already fear. Those concerns are out there."

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