Fed Chair Powell Acknowledges the Russia/Ukraine Impact – Insists That Rate Hikes are Still on the Way

Interest rate rises are still on the way, according to Federal Reserve Chairman Jerome Powell, who warned us on Wednesday that the Russia-Ukraine conflict has thrown the bigger picture outlook into doubt. Powell expects a series of quarter-percentage-point rate hikes, but he left the door open to acting more forcefully if inflation persists.

The central bank director acknowledged the “tremendous hardship” the Russian invasion of Ukraine is creating in statements prepared for two hearings this week before House and Senate committees in Congress. “The implications for the U.S. economy are highly uncertain, and we will be monitoring the situation closely,” Chairman Powell stated.

“The near-term effects on the U.S. economy of the invasion of Ukraine, the ongoing war, the sanctions, and events to come, remain highly uncertain,” Powell added. He went on to say, “Making appropriate monetary policy in this environment requires a recognition that the economy evolves in unexpected ways. We will need to be nimble in responding to incoming data and the evolving outlook.”

  • What more did Fed Chairman Jerome Powell have to say, and what makes it relevant?
  • How could this continued conflict relate to the global pandemic and economic recovery

Later on, Powell stated that the Fed aims to get inflation under control, but that “the bottom line is that we will proceed,” adding, “but we will proceed carefully as we learn more about the implications of the Ukraine war on the economy.” The comments come as inflation in the U.S. reaches 40-year highs, worsened by a Ukraine crisis that has pushed oil prices to their highest levels in a decade. In January, consumer prices rose 7.5% year over year, the highest 12-month gain since 1983, according to the Fed’s preferred inflation indicator.

Powell and his colleagues have been hinting for weeks that they want to begin hiking interest rates to combat inflation. On Wednesday, he maintained his position that the process will include “interest rate increases,” as well as hints that the Fed will ultimately begin to reduce its bond holdings.

“We will use our policy tools as appropriate to prevent higher inflation from becoming entrenched while promoting a sustainable expansion and a strong labor market,” Powell added. “We have phased out our net asset purchases. 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 (March).” Powell stated that rate rises would most likely be in quarter-percentage-point increments. However, he also said that if inflation worsens, he might be open to more aggressive measures.

Powell noted that after rate rises have commenced, the Fed would begin to reduce the size of its asset holdings. Since the outbreak, the Fed has been buying Treasurys and mortgage-backed securities at an unprecedented rate, bringing the central bank’s current total holdings to about $9 trillion. The decrease will be carried out “in a predictable manner,” according to Powell, primarily by letting certain bond profits roll off each month rather than reinvesting them. The goal here is for inflation to continue to fall.

In terms of the economy, the Federal Reserve Chairman noted that once supply chain difficulties are rectified, he expects inflation to slow down during the year. He described the job market as “extremely tight,” noting that as a silver lining, lower-paid workers and minorities have seen – and continue to see – significant salary increases.

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