Federal Reserve Chairman Jerome Powell still expects interest rate hikes, but noted Wednesday that the Russia-Ukraine war has injected uncertainty into the outlook.
Powell said he expected a series of quarter-percentage-point increases to come, although he left open the possibility of acting more aggressively if inflation persisted.
In remarks prepared for a dual appearance this week before House and Senate committees in Congress, the central bank chief acknowledged the “enormous difficulties” the Russian invasion of Ukraine is causing.
“The implications for the US economy are very uncertain, and we will be monitoring the situation closely,” Powell said.
“The short-term effects on the U.S. economy of the invasion of Ukraine, the ongoing war, sanctions, and future events remain highly uncertain,” he added. “Developing appropriate monetary policy in this environment requires recognizing that the economy is changing in unexpected ways. We will need to be nimble in reacting to incoming data and changing outlooks.”
Later he said the Fed wanted to get inflation under control, but “the bottom line is that we will continue, but we will proceed with caution as we learn more about the implications of the war in Ukraine on the economy.” .
The observations come amid 40 years for inflation in the United States, complicated by a war in Ukraine that pushed oil prices to their highest levels in a decade. Consumer prices rose 7.5% from a year ago in January, and the Fed’s favorite inflation gauge posted its biggest 12-month gain since 1983.
Powell and his fellow policymakers have been indicating for weeks that they plan to start raising benchmark interest rates to fight inflation. He reiterated the stance on Wednesday that the process will involve “interest rate hikes,” along with indications that the Fed will eventually begin to reduce its bond holdings.
“We will use our policy tools appropriately to prevent higher inflation from taking hold while promoting a sustainable expansion and a strong labor market,” he said. “We have phased out our net asset purchases. With inflation well above 2% and a strong labor market, we believe it will be appropriate to raise the target range for the fed funds rate at our meeting later. this month.”
Powell said the likely trajectory for rate hikes would be quarter-percentage-point increases, although he said he would be open to more aggressive action if inflation worsens.
“We will avoid adding uncertainty to what is already an extraordinarily difficult and uncertain time,” he said during questioning from members of the House Financial Services Committee. “To the extent that inflation is higher or higher than that, we would be prepared to act more aggressively by raising the fed funds rate by more than 25 basis points at a meeting or meetings.”
Inflation is expected to fall further
The Fed will begin to reduce the size of its holdings after rate hikes begin, he added.
Since the start of the Covid pandemic, the Fed has been buying Treasuries and mortgage-backed securities at the fastest pace on record, bringing the total holdings on the central bank’s balance sheet to nearly $9 trillion. of dollars.
Powell said the reduction will be done “in a predictable manner,” largely by allowing a portion of the bond proceeds to be withdrawn each month rather than reinvested.
On the economy, the president said he still expects inflation to ease throughout the year as supply chain issues are resolved. He called the labor market “extremely tight” and noted strong wage increases, especially for low-wage earners and minorities.
“We understand that high inflation imposes significant hardship, especially on those least able to afford the higher costs of essentials like food, shelter and transportation,” he said. . “We know that the best thing we can do to support a strong labor market is to promote a long expansion, and that is only possible in an environment of price stability.”
Markets fully priced in a rate hike at the March 15-16 meeting, but have lowered their expectations for the rest of the year since the start of the war in Ukraine, according to data from the CME Group. Traders now expect five quarter-percentage-point increases that would take the benchmark federal funds rate from its current range of 0% to 0.25% to 1.25% to 1.5%.
Fed Chair Powell notes ‘very uncertain’ impact on Ukraine, but says rate hikes are still to come
Source link Fed Chair Powell notes ‘very uncertain’ impact on Ukraine, but says rate hikes are still to come