(Bloomberg) -- Federal Reserve Chair Jerome Powell stuck to his message that interest rates need to keep rising to quash inflation and this time, the bond market listened.

In particular, Powell floated the idea during an event in Washington on Tuesday that borrowing costs may reach a higher peak than traders and policymakers anticipate. 

The talk was Powell’s first since last Wednesday, following the Fed’s decision to raise rates by a quarter point, when markets shook off his warning that rates were headed up and rallied anyway. The chair offered similar words again but, in the aftermath of a red-hot January employment report, they hit home harder.

“We think we are going to need to do further rate increases,” Powell told David Rubenstein during a question-and-answer session at the Economic Club of Washington. “The labor market is extraordinarily strong.”

If the job situation remains very hot, “it may well be the case that we have to do more,” he said.

Much stronger than expected US government data on Friday showed employers added 517,000 new workers in January while unemployment fell to 3.4%, the lowest rate since 1969. Powell said the report “shows you why we think this will be a process that takes a significant period of time.”

Stocks and Treasuries sold off after an initial rally as the Fed chair opened the door to a higher peak rate in 2023 if the job market doesn’t start cooling.

His remarks suggest that the 5.1% interest-rate peak forecast by officials in December, according to their median projection, is a soft ceiling. Powell sounded willing to follow the data and move higher if necessary. 

The Federal Open Market Committee lifted its benchmark rate by a quarter percentage point to a range of 4.5% to 4.75% last week. The smaller move followed a half-point increase in December and four jumbo-sized 75 basis-point hikes prior to that.

A string of milder readings on price pressures has fanned optimism that the Fed was winning the battle against inflation that last year reached the highest level in four decades. But officials say they are determined not to declare victory prematurely.

January’s consumer price report could cool by less than expected, underscoring the need for the Fed to push ahead with rate hikes in march and May, said Omair Sharif at Inflation Insights in Sacramento.

“There are still plenty of hurdles on the horizon for inflation,” he said. “You will see some repricing here” as investors adjust to how high they expect the Fed to lift borrowing costs.

Investors, responding to January’s sizzling employment report, now expect rate to rise to just above 5%, similar to what Fed officials forecast in December.

Powell has argued that easing pressure in the labor market is part of the answer to cooling off inflation in core services, excluding housing, a measure he has highlighted.

U.S. central bankers were caught off guard by a rapid rise in prices in the final quarter of 2021. Inflation, by their preferred measure, rose 5% in the 12 months through December, far above their 2% target.

While some measures of inflation have cooled in recent months, Powell told reporters last week that officials need “substantially more evidence” to be confident that inflation is on a downward path.

--With assistance from Steve Matthews, Jonnelle Marte and Margaret Collins.

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