Powell says rates will rise, even if Ukraine poses uncertainty issues

Jerome H. Powell, chairman of the Federal Reserve, told lawmakers on Wednesday that the central bank was set to raise interest rates at its meeting this month as it tried to calm inflation. high – claiming that Russia’s invasion of Ukraine was adding to economic uncertainty, he is yet to throw the Fed off course.

Mr Powell, testifying before the House Financial Services Committee, said the economic path forward remained uncertain as Russia invaded Ukraine and the world reacted. He described with more clarity than usual how the Fed views policy in the months ahead, saying, “We will avoid adding uncertainty to what is already an extraordinarily difficult and uncertain time.”

As inflation picks up, the labor market strengthens and the economy grows rapidly, the Fed chief said he believes a quarter-point hike in interest rates would be appropriate at the central bank meeting, which ends on March 16. He expects the Fed to make a “streak” of hikes this year. And he thinks officials will agree to a plan to reduce their bond holdings on the balance sheet in the coming months, as they had planned.

“The question now is really how the invasion of Ukraine, the ongoing war, the response of nations around the world – including sanctions – may have changed that expectation,” Powell said. “It’s too early to say for sure, but for now I would say we will proceed cautiously along the lines of that plan.”

Mr Powell stressed that flexibility was key, as it was too early to know what today’s geopolitical turmoil would mean for the US economy.

Economists have said the conflict is likely to drive up the prices of gas and other commodities, further raising inflation – already oil prices have soared. But at the same time, a combination of higher fuel costs and a climate of consumer confidence could dampen economic growth. Given the unclear effects on the U.S. economy, Powell said, the Fed will need to remain “agile.”

The Fed Chairman and his colleagues must balance the risks Ukraine poses to both inflation and growth against another pressing reality: Price gains in America had already been high for about a year. Fed policymakers, who are responsible for keeping prices stable, want to ensure that these rapid increases do not become a permanent feature of the economic backdrop.

“The game plan is to prevent recent high inflation results from persisting,” Michael Gapen and colleagues at Barclays wrote in a research report, summarizing the gist of Mr Powell’s testimony.

Prices are rising at the fastest pace in four decades, rising 7.5% on the year to January in the closely watched consumer price index and 6.1% in the inflation gauge favorite of the Fed, the personal consumption expenditure index. The central bank is targeting inflation of 2% on average over time. Mr Powell attributed the stubbornly rapid increases to strong consumer demand, particularly for goods, which has been “bumped up” by limited supply.

“To admit that inflation – to proclaim that inflation – is far too high, and that we are committed to using our tools to bring it down, that is really a very, very high demand,” said Mr. Powell. “It’s a very different story of inflation than we’ve had in the past, but we have to deal with it, and we will.”

Mr Powell said the Fed expected inflation to cool this year as it raised interest rates, government pandemic relief spending waned and constraints supplies were dissipating. But officials are also keeping a close eye on factors that could keep it high.

If price gains don’t start to decline in 2022, he said the central bank would be ready to “act more aggressively” and make a bigger rate hike than usual. Markets were expecting the Fed to raise rates, which are close to zero, by half a percentage point in some meetings.

“We will use our policy tools appropriately to prevent higher inflation from taking hold while promoting a sustainable expansion and a strong labor market,” Powell said.

His testimony underscored the tense political and economic moment facing the Fed — and policymakers in Washington — as a war rages abroad and inflation grabs headlines and scares consumers at home. .

Today’s economy has many bright spots, which Mr. Powell pointed out: Growth has been stronger than in many other advanced economies and jobs are plentiful, creating opportunities for workers.

“The labor market is extremely tight,” Powell said. He added that “employers are struggling to fill vacancies, an unprecedented number of workers are resigning to take new jobs and wages are rising at their fastest pace in many years.”

But this strong progress has been partly obscured by the rapid rise in prices, which is eating away at the wages of many workers. Average hourly wage growth has struggled to keep up with price increases in recent months.

President Biden called tackling high prices his “top priority” in his State of the Union address on Tuesday night. But while the White House has suggested changes it and Congress could make to help bring more supply into the economy — whether it’s improving shipping or fostering more domestic manufacturing – it would probably take some time. When it comes to controlling inflation by dampening demand, the Fed has primary responsibility.

“Inflation is too high, we understand that and we’re working on it – it’s going to take time, but we’re going to get it under control,” Powell said. “By the way, we see this all over the world. We see it more in the United States, because our economy is stronger, but we see it all over the world.

It is true that price increases in the age of the pandemic have been surprisingly rapid in much of the world.

Fed and White House officials, as well as most private sector economists, expected the U.S. recovery to slow rapidly last year. Instead, waves of coronavirus infections kept factories closed, shipping routes remained clogged, consumer demand remained abnormally biased towards goods and away from services, and costs continued to climb.

Now, as price hikes extend beyond pandemic-hit properties and begin to drive up rents and other service costs, officials are intently focused on curbing inflation.

But the Fed is navigating between dangers as many officials on its board live in a kind of political vacuum. Mr. Powell, whom Mr. Biden has reappointed for a second term as president, is technically serving on an interim basis pending Senate confirmation – a vote that has been delayed as Republicans boycott one of the other presidential candidates. Mr. Biden at the Fed.

He will testify Thursday before the Senate committee which is blocking his appointment and those of his future colleagues. While Mr. Powell avoided talking about the nominations on Wednesday, Mr. Biden did address them in his remarks on Tuesday evening.

“Confirm my appointments to the Federal Reserve, which plays a vital role in fighting inflation,” the president pleaded.

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