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Powell Seeks to Reassure Lawmakers Fed Will Curb Hot Inflation -Breaking

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© Reuters. Powell Attempts to Assure Lawmakers That The Fed Will Curb Inflation

(Bloomberg) — Federal Reserve Chair Jerome Powell will try to reassure lawmakers this week that the central bank will act to curb the hottest inflation in four decades while remaining flexible in the face of uncertainty posed by Russia’s invasion of Ukraine.

Powell is expected to give semiannual monetary policy testimony to the House and Senate panels beginning Wednesday. This will indicate that the U.S. central banking plans to proceed with plans to raise interest rates in March. Trades are likely to parse his remarks for any hint of a possible half-point move.

At the same time, he may acknowledge the risks created by the conflict, which has triggered one of the worst security crises in Europe since World War II and caused oil prices to jump — are complicating the Fed’s job.

Officials must deal with the potential stagflationary consequences of the invasion. Inflation could rise if higher oil prices cause lower demand and less spending power.

Adding to the uncertainty is Powell’s own position: He’s currently serving as chair “pro tempore” while awaiting Senate confirmation to a second term. His and other Fed nominations remain stalled over Republican opposition to President Joe Biden’s pick of Sarah Bloom Raskin for Fed vice chair of supervision.

 

 

“Powell will be teeing up liftoff, but also he is going to convey a high sense of uncertainty,” said Ethan Harris, head of global economics research at Bank of America Corp (NYSE:)., who’s predicting a quarter-point move in March. “He needs to give a balanced talk that expresses concern about inflation and recognizes the strength in economic growth but says we don’t need to rush and there are uncertainties out there.”

In the aftermath of Russia’s invasion, Fed officials signaled that they are ready to increase interest rates at their March 15-16 meeting to combat inflation. However they also keep their options open as to how far they will move after liftoff.

Bloomberg Economics’ Take on…

“Bloomberg Economics expects Powell to sound vigilant on inflation, but ultimately favor the gradualist approach to rate hikes due to elevated market uncertainty from the Russia-Ukraine crisis. We don’t believe he will endorse a 50 basis-point increase for March. Bloomberg Economics expects the Fed to deliver a 25 basis-point hike in March.”

Anna Wong and Yelena Schulyatyeva (Bloomberg economists).

Click here to read the Note 

Powell may be facing a tough time due to rising oil prices. The annual inflation rate could rise above 7.5% for January. It could also reduce U.S. economic growth by reducing consumer spending. Oil prices have surged in the wake of Russia’s attack.

“This is the Fed’s nightmare scenario, as we are pouring fuel onto an already well-kindled fire of inflation,” said Diane Swonk, chief economist for consultancy Grant Thornton. “The situation has eerie similarities to the 1970s, with external oil shock threatening a more entrenched and vicious inflation cycle.”

Both economists and traders see the Fed raising rates in March. The possibility of a quarter-point change is completely priced in. As investors evaluate the potential impact of Russian aggression upon growth and Fed policy, bets on a larger move of half-point have been reduced dramatically.

Raphael Bostic, President of Atlanta Fed, stated Monday that he supports raising rates 25 basis points by March. He was also open to discussing an additional 50 basis point increase in the event inflation data is too hot between now and then.

Officials left rates near zero in January but said they were ready to raise them “soon.” Powell’s post-meeting press conference was viewed as as hawkish at the time, leading some investors to anticipate a half-point move, but he was expected to strike a more careful tone during his testimony.

“He will be more cautious given the financial market nervousness created by the Russian military assault and this will likely cement expectations for a 25 basis point rate increase,” said James Knightley, chief international economist at ING.

Data on Friday showed the Fed’s preferred gauge of price pressures rising 6.1% in the 12 months through January — three times the 2% target and the most since 1982. The consumer price index has also shown an increase of 7.5%. It will release the CPI report for February 10th. Friday’s February employment report will provide another piece of important evidence for officials.

While inflation will be a focus, lawmakers could also ask Powell about the role of the Fed in implementing sanctions on Russians through the central bank’s payment system, said John Silvia, founder of Dynamic Economic Strategy and former chief economist at the Senate banking panel.

©2022 Bloomberg L.P.

 

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