Powell says the Fed is set to raise interest rates in two weeks

“For now, I would say that we will proceed carefully in line with this plan,” Mr Powell told the House Financial Services Commission on Wednesday. “We will avoid adding uncertainty to what is already an extremely challenging and uncertain moment.

Although it was too early to say how the war and heavy sanctions imposed by the West on Moscow would affect the US economy, he said there was a general urgency to continue tightening policy.

The S&P 500 rose 1.9 percent on Wednesday, a day after the index fell 1.6 percent. Yields on benchmark 10-year treasury bonds are particularly volatile. They rose to 1.862%, from 1.708% on Tuesday and 1.836% on Monday.

Mr Powell has effectively put an end to the debate among markets and other Fed officials over whether they will raise interest rates from zero this month by more than half a percentage point. At the same time, he laid the groundwork for the possibility of a half-point increase this summer, rejecting the idea that more traditional quarter-point increases represent a speed limit for the Fed.

Consumer prices rose 6.1 percent in January from a year earlier, according to the Fed’s preferred rate. With the exception of variable food and energy categories, so-called core inflation rose by 5.2%, close to a 40-year high. “This is strong, high inflation and it is very important that we overcome it, and that is exactly what we will do,” Mr Powell told lawmakers.

Mr Powell said his colleagues expected inflation to peak and fall soon. “To the extent that inflation is higher or more sustained than that, then we would be prepared to act more aggressively,” raising interest rates by half a percentage point in one or more meetings later this year. The Fed has not raised interest rates by half a point since 2000.

Mr Powell also said he expected the Fed to make “good progress” in preparing plans to shrink its $ 9 trillion asset portfolio, but that he would not finalize those plans at his March 15-16 meeting.

The global economy is recovering from a series of “supply shocks” in which shortages of goods or services raise prices. The textbooks call on central banks not to react to one-off price increases resulting from temporary factors such as natural disasters, but instead to focus on broader core inflationary pressures.

However, officials are beginning to worry about an overheated labor market with rising wages well above their pre-pandemic levels and the risk of consumers and businesses expecting higher prices to rise in the future, which encourages consistently higher inflation.

Fed officials last spring and summer attributed much of the rise in inflation to bottlenecks in the supply chain, which would not necessarily require a political response if these breakages were expected to resolve themselves in a few months. On Wednesday, Mr Powell suggested that high inflation was the result of a clash between both strong demand and supply constraints. The focus on demand is important, as raising the Fed’s interest rates could lead to a balance between supply and demand by slowing rents and broader economic activity.

Mr Powell said labor shortages were raising wages, and the Fed was watching closely for signs that the war in Ukraine would lead to even higher prices. The Fed will not have to raise interest rates so much, he said, if bottlenecks are eased and more workers return to the job market.

“Honestly, we have the tools and we will use them to control inflation, but as long as we get help from supply, it will make this job much easier,” he said.

His remarks underscore the challenge facing the central bank as it prepares to raise interest rates for the first time since 2018. During geopolitical turmoil, the Fed generally avoids taking steps that increase uncertainty. But as inflation exceeds its 2% target and the Ukrainian crisis threatens to push prices even higher, the Fed may feel more pressure to raise interest rates.

While Russia’s direct trade links with the US economy are not significant, Mr Powell pointed to the risk of unintended and downstream effects from rising prices for oil, natural gas and other goods for which Russia is a major exporter, including neon, palladium, wheat and manure. “Events like war will raise the price of oil and gas, and that will certainly affect prices,” he said.

Lawmakers have pressured Mr Powell over the Fed’s previous view that inflationary pressures would ease faster than last year. “I always thought there was a chance we could make a mistake and that if we made a mistake, we could turn around, and we made a turn and turned around pretty quickly,” he said last December. “But then the economy was really moving very, very fast.”

However, he said the labor market was strong enough for the economy to keep up. He said he hoped the economy could slow down enough to slow rising prices and wages without leading to a recession or period of high inflation, as seen in the 1970s – the so-called soft landing.

“We haven’t faced this challenge in a long time, but we all know the story and we all know what we have to do,” Mr Powell said. “I think it is more likely than not to achieve what we call a soft landing.

Later, when he was pressed whether the Fed’s response might have to be so strong that such a soft landing would be impossible, he said: “There are no guarantees in life. But that is our intention and what we propose to do. “

Write to Nick Timiraos at [email protected]