The wave of price increases that has complicated the US pandemic recovery could last longer than anticipated, Federal Reserve Chair Jerome Powell acknowledged Tuesday, opening the door to raising interest rates sooner.

It was a distinct shift by the central bank chief who for months tried to assuage fears by saying the inflation spike would be "transitory," and pledged to be patient before raising interest rates.

The uptick in inflation has put pressure on Powell and become a political liability for President Joe Biden, who is pushing a divided Congress to pass a massive bill improving social services and fighting climate change.

"Clearly the risk of more persistent inflation has risen," Powell said in testimony before the Senate Banking Committee.

He pledged that policymakers "will use our tools to make sure that higher inflation does not become entrenched."

Data released last week showed the central bank's preferred price gauge surged five percent for the 12 months ending in October, well above the Fed's two-percent goal and its biggest jump since 1990.

Powell, whom Biden last week nominated to a second term as central bank chief, has previously said policymakers could be patient before raising lending rates.

However, he signaled in his testimony that it may be appropriate to speed up the pace of the recently begun pullback in monthly asset purchases.

That would mean the Fed would be in a position to raise the benchmark interest rate sooner.

At its policy meeting earlier this month, the Fed decided to begin reducing its monthly bond purchases, announcing a pace that would end them in the middle of 2022.

But since then, data has shown "elevated inflation pressures, a rapid improvement in many labor market indicators" and "strong spending" that signals "significant growth in coming months," Powell said.

Therefore it is "appropriate, in my view, to consider wrapping up the taper of our asset purchases... perhaps a few months sooner."

Federal Reserve Chair Jerome Powell has changed his tune on inflation, and opened the door to raising US interest rates sooner
Federal Reserve Chair Jerome Powell has changed his tune on inflation, and opened the door to raising US interest rates sooner AFP / JIM WATSON

The Fed slashed the benchmark lending rate to zero at the start of the pandemic, and Powell has said policymakers will not raise rates until the bond-buying program ends.

A growing number of Fed officials have publicly supported a faster taper and one or two rate increases next year, while some private economists are calling for three hikes.

Powell has for months described the burst of inflation fueled by supply chain snarls and shortages of goods and workers as "transitory," but told lawmakers it is time to "retire" the term.

The initial inflation spike showed up in auto prices, due to a shortage of critical computer chips resulting from the ongoing pandemic restrictions that disrupted semiconductor production in Asia.

Americans, who went on a spending spree as the economy opened up, have also faced rising costs for gasoline, housing and other products, and in many cases cannot find the goods they want.

Powell acknowledged that central bankers in their predictions missed the "enormous amount" of supply chain problems and the impact they would have on prices, and the increases have been more widespread than anticipated.

But the Fed continues to believe the pressures will subside in the second half of the year, he said.

Prior to the next meeting of the Fed's policy committee on December 14-15, central bankers will see data on employment and consumer prices in November.

There may also then be more details about the Omicron variant of Covid-19, and whether it is likely to set back the recovery, as the Delta strain did.

"Today will go down as the day Fed Chair Powell shed his dovish wings and showed signs of becoming a hawk," said Oanda analyst Edward Moya.

He said the change of message was "conveniently timed," coming a week after Powell's renomination.

Financial markets reacted strongly to the likelihood interest rates will rise sooner than expected, with the benchmark Dow ending nearly two percent lower while the dollar strengthened.

Cliff Hodge of Cornerstone Wealth said, "Markets, which were already jittery on Omicron fears, were shocked" by Powell's testimony, and "sold off hard."