By Howard Schneider

WASHINGTON (Reuters] – Wednesday, the Federal Reserve will stop its easy-to-implement pandemic-era monetary strategy and increase the effort to fight stubbornly high inflation. This is the first of a likely series of interest-rate hikes for this year.

The shift, beginning with an expected quarter-percentage-point increase in the U.S. central bank’s benchmark overnight interest rate, has been in the works since last fall and has already driven up the cost of home mortgages and other key types of credit in anticipation of what the Fed will do to curb prices that are rising at their fastest pace in 40 years.

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Yet, the Fed’s policy meeting next week was hampered by the fact that inflation is not showing signs of slowing down and may rise even further in light of Russia’s invasion Ukraine. The latter has led to an increase in the oil price this month.

It will give the Fed’s latest policy statement, along with the updated quarterly economic-interest rate projections details, the first tangible guidance on how it has affected policymakers. This includes whether the new language and detail of Fed’s policy statements will help to determine if the Fed has dampened confidence that current economic expansion can continue while inflation drives lower.

Jerome Powell, Fed Chair, spoke to Congress this month. He said that he believed it was more likely than not that we could achieve “a soft landing” (which is inflation under control and without going into recession).

He also admitted that the central bank was still in an uncertain environment, possibly more like the 1970s high-inflation years than the current low inflation environment.

In testimony before U.S. House of Representatives Financial Services Committee, Powell stated that “We haven’t faced this problem in a long while.” We all know the past and know what needs to be done.

New projections will be released alongside the policy statement at 2.pm EDT (1800 GMT). They will reveal how aggressive officials believe they need to be and whether the federal funds target rate is rising too high to hurt the economy or increase unemployment.

The Fed did not adopt these restrictive policies during the recession and financial crisis of 2007-2009. It only made them available once in 2017, in response to President Donald Trump’s deficit spending spree in 2017. Rates have never risen that much before the economy began to collapse.

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The motivation is inflation. Inflation is the Fed’s favorite gauge of price pressures. The Fed is increasing at an annual pace that’s triple its 2% target.

The COVID-19 Pandemic caused unpredictable economics. However, the developments in Europe make it almost impossible to predict the future.

For example, the price of U.S. West Texas Intermediate crude rose by 33%, to $123/barrel in just a few days after Russia’s February 24th attack on Ukraine. It was back at $95 per barrel on Tuesday, close to where it was prior to the war.

However, this decline was primarily driven by China’s new coronavirus lockdowns that can cause more economic problems.

This situation is “unfortunate” for Federal Reserve which has been chasing inflation since 1980s. According to GrantThonton chief economist Diane Swonk: “The disruptions we see are adding fuel for an already kindled inflation fire.”

Powell will be treading carefully, trying to strike a balance between the need raise rates and curb inflation. She also warned against a “meltdown” by the central bank if it increases rates too fast.

A NIMBLE APPROACH

Powell will host a news conference approximately half an hour after publication of the forecasts and the policy statement. Powell will probably not only give an overview of the statement but also update us on how and when to reduce Fed’s approximately $8.5 trillion portfolio, including mortgage-backed securities and government bonds. A second tool that can be used to tighten monetary policies will be available later in the year.

Powell used terms like “nimble,” to describe the way he views a situation where policymakers might have to adjust on the fly and have repeatedly been fooled in the past by economic events, from faster than expected recovery to slow returns of workers to their jobs.

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But the Fed’s larger thinking will be on full display in both the language and detail of the updated policy statement.

According to Fed officials, they felt that inflation could be controlled with relatively little intervention. They increased the target federal funds rates, which are currently close to zero, by 2.1% before 2024. A level policymakers still consider restrictive.

At that time, however, the policymakers believed inflation would fall to 2.6% in 2022 and then decline as world and U.S economies dealt with the effects of the pandemic. However this outlook has been proven out-of-step.

Evercore ISI Analysts Krishna Guha and Peter Williams said that given inflation levels, “the message needs to be at minimum somewhat hawkish.” However, officials will still want to stress, “that now more then ever, nothing is set in Stone.”