Stocks on Wall Street closed sharply lower on Tuesday after Federal Reserve Chairman Jerome Powell indicated that the central bank's interest rates could exceed its initial estimates.
Mr Powell was addressing the US Senate Banking Committee after economic data for January came in stronger than anticipated.
Consumer spending remains resilient, the unemployment rate remains at a 53-year low and the Fed's preferred inflation gauge rose by 0.5 per cent.
That data has “partly reversed the softening trends”, Mr Powell said.
“If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,” he told the committee.
“Although inflation has been moderating in recent months, the process of getting inflation back down to two per cent has a long way to go and is likely to be bumpy.”
Wall Street shares continued their fall until trading closed. The Dow dropped 574 points while the S&P 500 and Nasdaq Composite dipped 1.53 per cent and 1.25 per cent.
The 10-year Treasury, which is a benchmark for other borrowing rates, neared 4 per cent before falling back to 3.97 per cent.
Tuesday's appearance before the committee was Mr Powell's first testimony since the Fed began its battle against inflation.
When he spoke to politicians on March 3 last year, interest rates were near nil. Today, the rate stands near 4.6 per cent.
The Fed has announced eight interest rates rises since Mr Powell last testified before Congress, but inflation still remains well above the central bank's 2 per cent goal.
He has since cautioned that the Fed would continue to maintain a restrictive stance.
“We will stay the course until the job is done,” Mr Powell said.
Traders now expect the Fed to announce another interest-rate rise of 50 basis points this month, CME's FedWatch tool shows, which would bring interest rates to the range of 5.25-5.50 per cent.
The Labour Department this week will also be releasing last week's jobless claims and last month's closely monitored unemployment report, which could worry traders even more.
The Fed will also receive the Consumer Price Index for February next week before its March 21-22 meeting.
Mr Powell's testimony on Capitol Hill was part of his semi-annual Monetary Policy Report to Congress.
He is scheduled to testify before a US House committee on Wednesday.