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Fed Chair Powell notes ‘highly uncertain’ Ukraine impact, but says rate hikes are still coming

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Jerome Powell, the Chairman of Federal Reserve Board, spoke at a hearing to determine whether he should be renominated by Senate Banking, Housing and Urban Affairs Committee on January 11, 2022, Washington, DC.

Pool / Getty

Jerome Powell of Federal Reserve noted Wednesday that while Powell believes there will be interest rate increases, he also sees uncertainty in the future.

The central bank chief spoke out in remarks for two appearances before Congress’ House and Senate Committees. He acknowledged the “tremendous hardships” that the Russian invasion has caused.

Powell stated that the implications of the U.S. economic downturn are “highly uncertain” and that he would be closely monitoring them.

His comments included that “the near-term consequences on the U.S. economic economy of the invasion in Ukraine, the ongoing conflict, the sanctions, as well as of future events, are highly uncertain.” Making the right monetary policy for this environment will require recognizing that economies change rapidly. It will be necessary to respond quickly to new data and to the changing outlook.

These remarks are made amid inflation at its highest level in 40 years in America. This is complicated by the Ukraine war, which has driven crude oil prices to their highest point in over a decade. In January, consumer prices rose 7.5% compared to a year earlier. The Fed’s preferred inflation indicator showed the Fed’s strongest 12-month increase since 1983.

Powell, along with his colleagues in policymaking have indicated for several weeks that they will raise benchmark interest rates to combat inflation. The Fed may eventually reduce its bond holdings, Powell said Wednesday.

He stated that he would use his policy tools to stop higher inflation becoming entrenched and promote a sustainable growth and strong labor market. “We have discontinued net asset purchases. We expect that with inflation at a high level of 2 percent, and strong labor markets it will make sense to increase the Federal Funds Rate target range during our next meeting.

Still expected that inflation will fall

After rate rises begin, the Fed will reduce its asset holdings, he said.

The Fed has been purchasing Treasurys and mortgage-backed Securities at an unprecedented pace since the Covid pandemic began, which has pushed the Fed’s total balance sheet to almost $9 trillion.

Powell indicated that the reductions will be made “in an predictable manner,” with some proceeds of bonds being allowed to roll-off each month instead of being reinvested.

The chairman stated that he expects the inflation rate to slow down throughout the year, as long as there are no supply chain problems. The chairman called the labor market extremely tight and pointed out strong wage gains for minorities and lower-earners.

He said that high inflation causes significant hardships, particularly for those who are not able to pay the increased costs of food, housing and transport. We know the only way to help a strong labor force market is by encouraging long-term expansion. This is possible only in an environment that promotes price stability.

CME group data shows that markets fully anticipated a rate rise at their March 15-16 meeting, but they are now expecting lower expectations for the rest. Traders are now pricing in five quarter-percentage-point increases that would take the benchmark federal funds rate from its current range of 0%-0.25% to 1.25%-1.5%.

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