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Fed’s Powell says policy pivot on track despite ‘uncertain’ impact of Ukraine war -Breaking

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© Reuters. FILE PHOTO (c) Reuters. Jerome Powell, Federal Reserve Chairman, testifies at a U.S. House Oversight and Reform Select Subcommittee hearing about the coronavirus crisis on Capitol Hill in Washington. It took place June 22, 2021. Graeme Jennings/Pool via REUTERS

Howard Schneider, Lindsay (NYSE) Dunsmuir

WASHINGTON (Reuters] – The Federal Reserve is moving forward with its plans to raise interest rate this month in an effort to tame inflation. But, Jerome Powell, Fed Chair, said Wednesday that while the Federal Reserve’s plan to do so will be delayed due to the fact that Ukraine’s war has left policymakers “highly uncertain” about their future.

Powell repeated the Fed’s core narrative in prepared remarks that he gave to the U.S. House of Representatives Financial Services Committee. He stated again that high inflation, and a tight labor market are reasons for higher interest rates.

Powell stated that “We believe it will be appropriate for us to raise the target range of the federal funds rate during our meeting earlier this month” and that Powell will continue that trend later in the year, with reductions to the Fed’s roughly $8.5 trillion portfolio government securities.

Powell did not give any indications about the Fed’s policy of tightening. He said that Fed officials expect inflation to decrease later in the year.

U.S. equity futures lost some of their gains after Powell’s prepared remarks were released, but the yield on 2-year Treasuries increased. A basket of key trading partner currencies led to the U.S. dollar trading higher.

Paul Ashworth of Capital Economics, the chief U.S. economist said that “He prefer to keep Fed’s options opened… there wasn’t much pushback on current rate expectations which have plummeted after Russia’s invasion.”

Powell indicated that although the economic impact of the coronavirus epidemic seemed to be decreasing, he stated that employment was still strong and that inflation was an important risk.

According to the Fed chief, inflation “is currently running much higher than our long-term objective of 2%. According to the Fed chief, demand is high and production cannot respond as quickly as it can due to bottlenecks and other supply issues. He said that the supply disruptions were “larger than expected” and reiterated his promise of being as hard as possible to restore prices.

Although some current inflation pressures will ease in the second half of this year, we are still aware of possible further upward pressure. We will continue to use our policy tools to stop higher inflation becoming entrenched.

Powell acknowledged, however, the complexity of the Fed’s current situation from European events that could lead to increased price pressures and even undercutting growth.

He stated that the near-term economic effects of the U.S. invasion of Ukraine, ongoing war and sanctions as well as future events remain uncertain. The ability to make the appropriate monetary policies in such an environment is dependent on the recognition of unexpected economic developments. It will be necessary to respond quickly to new data and to the changing outlook.

THE IMPACT OF WAR

Policymakers thought that the temporary run of rapid price increases caused by the pandemic was permanent, but the Fed is now experiencing persistently high inflation.

They’ve debated the issue since last autumn.

The central bank expects to increase its benchmark overnight rate of interest, which is close to zero at the March 15-16 policy meeting. The cost of credit will continue to rise for businesses and consumers throughout the rest of the year with more rate hikes expected.

Although high inflation is still the Fed’s primary focus, Russia’s invasion in Ukraine added another dimension to the analysis of policymakers, and the potential for them to move monetary policy in the opposite direction. As energy prices rise and there are new limitations on movement of people or goods, inflation could increase.

However, global economic growth might take a knock just as U.S. governments and European governments were hoping that the pandemic was decreasing to the point when the last restrictions on socializing, schools, businesses and other activities could be removed.

The Fed may be called upon to stabilize global dollars markets, which could cause a conflict between plans to decrease its asset holdings and the ongoing war in Ukraine.

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