WASHINGTON, March 2 – Federal Reserve Chairman Jerome Powell, who is balancing high inflation in the United States against the complex new risks of a European ground war, said on Wednesday that the central bank would “carefully” raise interest rates at an upcoming meeting. in March, but will be ready to move more aggressively if inflation does not cool down as quickly as expected.
Powell called the Russian invasion of Ukraine a “change of game” that could have unpredictable consequences.
“Events are yet to come and we do not know what the real effect will be on the US economy,” Powell told the House Financial Services Committee during a monetary policy hearing overshadowed by the conflict in Europe.
But he said the Fed was now largely going as planned to raise its interest rate on federal overnight funds and reduce its balance sheet to curb inflation, which is currently the highest at 80 -the years of the last century.
Powell said he would support a quarter-point increase in interest rates at the Fed’s meeting on March 15-16, effectively putting an end to the debate on starting a post-pandemic round of raising interest rates by more than the usual half-point increase.
But the Fed chief said he was prepared to use larger or more frequent interest rate movements if necessary if inflation did not slow down and he may have to raise interest rates to restrictive levels above 2 over time. 5% – slowing economic growth, instead of just stimulating it less stably.
This is a fine difference, but a marker of Powell’s focus on inflation as a key battle for the Fed right now, a major concern that could undermine central bank confidence if it deteriorates, undermines household spending and distorts investment and decision-making. the costs of business and families.
The labor market, Powell noted in prepared testimonials, was “extremely tight,” and Fed officials said their goal of maximum employment had been effectively met. The pandemic’s impact on the economy appears to be waning and “demand is strong,” Powell said.
However, inflation has now tripled from the Fed’s 2% target and has become a major political concern for the Biden administration and members of Congress who came to Wednesday’s hearing, armed with anecdotes about voters paying more for basic goods or business delivery.
What Powell described as a clash between strong consumer demand and pandemic constraints on global product supply, “was not as transient as we had hoped … Other major economists and central banks around the world made the same mistake. That doesn’t excuse him, but we thought these things would be resolved long ago. “
RAMKRAN FROM CONFLICT IN UKRAINE
Federal Reserve Chairman Jerome Powell testifies during the House of Representatives subcommittee on oversight and reform on the Capitol Hill coronavirus crisis in Washington, DC, June 22, 2021. Graham Jennings / Poole via REUTERS
But even with the immediate focus on inflation, Powell’s testimony was shaped by the conflict in Ukraine and what it could mean for the United States and world economies in the coming weeks or even years.
Powell said that the Fed’s staff had begun to analyze various scenarios, but that too much remained unknown about an event whose full consequences could “be with us for a very long time.”
“The short-term consequences for the US economy of the invasion of Ukraine, the ongoing war, sanctions and the events that lie ahead remain very uncertain,” Powell said. “Implementing an appropriate monetary policy in this environment requires recognizing that the economy is developing in unexpected ways. We will have to be agile in responding to input and changing perspectives. “
“We will continue to be careful as we learn more about the effects of the war in Ukraine on the economy,” Powell said. “We expect inflation to peak and begin to decline this year. As inflation rises or is steadily higher … we would be prepared to act more aggressively by raising interest rates on federal funds by more than 25 basis points per meeting or meetings. “
The Fed has cut interest rates to the current near-zero level in 2020 to blunt the impact of the coronavirus pandemic. There is now widespread agreement that the current level of borrowing costs is out of phase with an economy that has recovered faster than expected from the health crisis.
Lawmakers have asked Powell about the effects of rising oil prices following Russia’s actions, the threat of cyberattacks and wider risks to the financial system, and even the impact on the fertilizer market.
“Everything we can do … we do it to protect ourselves from cyberattacks,” Powell said. “The bigger financial institutions are doing it. It’s hard to say what is possible, but we are on high alert and will continue to be.”
As for the financial markets, Powell said that so far they are “functioning well. There is a lot of liquidity there” and the existing Fed programs are helping.
Powell will appear before the Senate Banking Committee on Thursday. The head of the Fed must testify before these committees of the House of Representatives and the Senate twice a year as part of the central bank’s semi-annual monetary policy reviews.
Major US stock indexes traded sharply higher, expanding profits during Powell’s testimony, and bond yields rose. The US dollar has changed slightly against a basket of currencies of major trading partners. Interest rate futures traders began pricing with six rate hikes this year from five on Tuesday.
Powell, “prefers to keep the Fed’s options open … there was little rebuttal to expectations of current market interest rates, which fell after the Russian invasion,” said Paul Ashworth, chief US economist at Capital Economics.
Report by Howard Schneider and Lindsey Dunsmoor; Edited by Paul Simao and Andrea Ritchie
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