Powell says Fed on track to raise rates in two weeks

Mr Powell said it was too early to tell how Russia’s invasion of Ukraine and tougher economic sanctions imposed by the West against Moscow would affect the US economy. But his overall remarks suggested a growing urgency to tighten the policy.

“Making appropriate monetary policy in this environment requires the recognition that the economy develops in unpredictable ways. We will need to be nimble in responding to incoming data and evolving outlook,” Mr. Powell said in the first two congressional hearings. Said in the testimony ready for delivery on Wednesday during the days.

His remarks underscore the challenge facing the central bank as it prepares to raise interest rates for the first time since 2018. Russia’s invasion of Ukraine, which prompted the West to impose harsh financial sanctions against Moscow this week, threatens to worsen inflationary pressures by disrupting supplies. chains and the rise in energy and commodity prices.

“The near-term effects on the US economy of the invasion of Ukraine, the ongoing war, sanctions and ensuing events are highly uncertain,” Mr. Powell said.

During geopolitical shocks, the Fed generally avoids taking steps that increase uncertainty. But with inflation running well above its 2% target and the Ukrainian crisis threatening to push prices up even more, the Fed could feel more pressure to raise rates.

Mr. Powell and his colleagues had predicted that US inflation, now running at a 40-year high, would hit its peak this quarter.

Consumer prices rose 6.1% in January from a year earlier, according to the Fed’s preferred gauge. Excluding volatile food and energy categories, so-called core inflation rose 5.2%, near a 40-year high.

Fed officials last spring and summer attributed most of the increase in inflation to supply-chain constraints, which don’t necessarily demand a policy response if those kinks are expected to resolve themselves. But in his testimony on Wednesday, Mr. Powell suggested inflation was higher because “demand is strong, and bottlenecks and supply constraints are limiting how quickly production can respond.”

The emphasis on demand is important because the Fed’s interest rate hikes can dampen demand by slowing hiring and economic activity more broadly.

Mr Powell said he expects the supply crunch to ease and demand soften due to the less impact of tighter monetary policy and fiscal stimulus from the past two years.

“But we remain mindful of inflation expectations from a number of factors and the risks of potential and upward pressure on inflation,” he said. “We will use our policy tools as appropriate to contain high inflation.”

Mr Powell painted the labor market as “extremely tight” and said the kind of broad job benefits the Fed sought last year while maintaining aggressive stimulus policies “is only possible in an environment of price stability”. “

The global economy is recovering from a series of “supply shocks”, in which a shortage of goods or services raises their prices. The textbooks call on central banks not to react to outright increases in prices that result from temporary factors, such as natural disasters, and to instead focus on broader underlying inflationary pressures.

But it could be difficult for the Fed right now because US inflation is already high. Officials are becoming increasingly concerned about an overheated labor market with wage gains above their pre-pandemic highs and the risk that consumers and businesses will expect larger price increases in the future, fueling persistently high inflation.