Federal Reserve Chairman Jerome Powell confirmed in testimony before Congress on Wednesday that the central bank would begin raising interest rates in two weeks amid growing urgency to combat surging inflation, while also warning that the economic impact of Russia’s invasion of Ukraine remains “highly uncertain.”
Powell reiterated that the Fed will hike rates later this month at its upcoming policy meeting as the central bank looks to combat surging consumer prices, which remain at 40-year highs, up 7.5% from a year ago.
Policymakers have been indicating months that the Fed will raise interest rates in March, and Powell reiterated that message Wednesday, saying he expects a 0.25% rate hike looks most likely.
Markets have fully priced in such a rate hike this month, but expectations for additional rate hikes this year have fallen since the start of the Russia-Ukraine conflict, with traders now expecting five quarter-percentage-point increases in 2022 (down from seven), according to CME Group data.
Powell said that the Fed is, however, prepared to raise interest rates “more aggressively” than just 25 basis points per meeting if higher inflation persists, while also adding that the Fed intends to start reducing its balance sheet after rate hikes begin.
The Fed chairman also said it was too soon to gauge the impact of Russia’s invasion of Ukraine—as well as the subsequent Western sanctions against Moscow, on the U.S. economy.
“The implications for the U.S. economy are highly uncertain, and we will be monitoring the situation closely,” Powell said, adding that the central bank will “need to be nimble in responding to incoming data and the evolving outlook.”
“With inflation well above 2% and a strong labor market, we expect it will be appropriate to raise the target range for the federal funds rate at our meeting later this month,” Powell said, promising that the central bank “will adjust the stance of monetary policy as appropriate to manage risks.” He still expects inflation to decline “over the course of the year” amid easing supply constraints and tighter monetary policy, though the central bank will need to remain “attentive to the risks of potential further upward pressure” on consumer prices.
What To Watch For:
“We will proceed carefully as we learn more about the implications of the Ukraine war for the economy,” Powell pledged on Wednesday. “We’re going to avoid adding uncertainty to what is already an extraordinarily challenging and uncertain moment.”