(Bloomberg) - Federal Reserve Chair Jerome Powell is making the fight against inflation his top priority over the risks from Russia’s invasion of Ukraine, backing a quarter-point interest-rate rise later this month.
In over three hours of testimony Wednesday, Powell was peppered with questions about prices from lawmakers with constituents worried by the rising cost of living. The Fed chair suggested that if inflation doesn’t start to ease, the central bank may have to get tough.
“I am inclined to propose and support a 25 basis-point rate hike” later this month, Powell told a House finance panel. “To the extent that inflation comes in higher or is more persistently high than that, then we would be prepared to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings.”
The Fed chief said it was too soon to conclude how Russia’s invasion of Ukraine will affect the U.S. economy and what that means for policy. But he acknowledged that the aggression could trigger a long-term reordering of international relations that would likely reshape the economies of Western Europe.
The rate of inflation is already at a 40-year high and if anything, higher energy and commodity prices resulting from the conflict will make the problem worse in the short run, said Jeanette Garretty, chief economist at Robertson Stephens in San Francisco.
“Monetary policy at the point we are at right now is primarily tactical,” Garretty said. “Over time the impact of Ukraine and the sanctions will become more apparent, and then the long term problem will be inflation and growth.”
Powell indicated the Fed doesn’t want to add to market uncertainty or volatility and his remarks effectively take a half-point hike off the table when officials meet March 15-16.
What Bloomberg Economics Says...
“Uncertainty from the Russia-Ukraine situation will linger this year. What that means, in our view, is that there’s now a lower likelihood of the more hawkish hiking path the market was pricing in -- a 50 basis-point hike in March or a hike at every meeting this year -- than before the invasion. Given high inflation, however, a slower pace of increases this year means the Fed may have to hike aggressively next year.”
-- Anna Wong and Yelena Shulyatyeva (economists)
--To read more, click here
Some U.S. central bankers members want the option of lifting rates from current levels near zero with a larger half-point hike, especially if consumer price data for February -- released March 10 -- shows price pressures heating up further. It will be their first rate increase since 2018.
“For the sake of providing stability and certainty amid an uncertain geopolitical situation, Powell pre-empted the decision at the meeting,” said Brett Ryan, senior U.S. economist at Deutsche Bank AG. “Then, in a nod to the hawks, he said we will discuss the possibility of 50 basis points at future meetings. So he reassured the hawks they will have their say.”
Three Fed officials in recent days have publicly discussed being open to a debate on raising rates by a half point this month if the data keeps coming in too hot -- Governor Christopher Waller and his fellow Governor Michelle Bowman, as well as St. Louis Fed President James Bullard.
Bullard said at a separate event Wednesday that the central bank’s credibility for fighting inflation was at stake.
“This situation calls for rapid withdrawal of policy accommodation in order to preserve the best chance for a long and durable expansion,” he said.
A separate report released by the Fed later on Wednesday showed that businesses across the country were raising prices in the face of increased input costs and higher wages.
“Firms reported an increased ability to pass on prices to consumers,” the Fed said in its Beige Book report, based on information collected through Feb. 18. “In most cases, demand has remained strong despite price increases. Firms reported they expect additional price increases over the next several months.”
While making clear in his remarks that policy makers will confront inflation, Powell declined to be drawn on how far or fast the central bank would raise rates.
‘Neutral’ or Higher?
The Fed chief said it wasn’t clear how high rates would have to rise to get inflation under control, in relation to the so-called “neutral” level that neither speeds up nor slows economic activity.
“We talk about getting to neutral, which is a neutral rate which would be somewhere between 2% and 2.5%. It may well be that we need to go higher than that. We just don’t know,” he said, adding that he believed it was possible to deliver that tightening without causing a recession.
“I think that it is more likely than not that we can achieve what we call a soft landing,” he said. “They are far more common in our history than is generally understood.”
Powell will appear before the Senate Banking Committee at 10 a.m. Thursday in Washington for the second day of his semi-annual congressional testimony.
By Craig Torres and Steve Matthews
