Jerome Powell of Federal Reserve noted Wednesday that while Powell believes there will be interest rate increases, he also sees uncertainty in the future.
Powell said he sees a series of quarter-percentage-point increases coming, though he left open the possibility of moving more aggressively should inflation persist.
In prepared remarks, the chief of the central bank acknowledged that Russia’s invasion of Ukraine has caused “tremendous hardship”.
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 economic trends can change in unpredictable ways. The evolving outlook and incoming data will require us to react quickly.
He later stated that the Fed wanted to control inflation, but the bottom line was “we will continue, but we will carefully consider the consequences of the Ukraine war for the economy.”
These observations were made in the context of inflation reaching 40 year highs in the U.S., complicated further by an ongoing war in Ukraine that has seen oil prices rise to levels not seen in 10 years. 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 and other policymakers have made it clear for weeks they intend to raise benchmark interest rates to address inflation. Powell reiterated Wednesday his stance that this will include “interest rate rises” and indications that eventually the Fed will reduce its bond holdings.
He said, “We will make every effort to keep higher inflation under control and encourage sustainable economic growth.” “We have stopped purchasing net assets. 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.
Powell indicated that the rate of increase for interest rates will likely be in increments of 25%, although he stated that he was open to making more aggressive moves should inflation rise.
He said, “We are going to prevent adding uncertainty to this already extraordinarily difficult and uncertain moment.” “If inflation rises or persists higher than the rate of inflation, then we’d be willing to act more aggressively and raise the federal funds interest by at least 25 basis points during a meeting.”
Expected fall in inflation
He said that the Fed would begin to reduce its assets holdings once rate increases have started.
Since the Covid pandemic started, the Fed began buying Treasurys, mortgage-backed securities, at the fastest rate ever. This has driven the Fed’s total balance sheet to close to $9 trillion.
Powell stated that the reduction would be done “in a predictable way,” in large part by allowing some of the proceeds from bonds to roll over each month, rather than 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. He described the labor market as “extremely tight”, and noted that wages have risen strongly, especially for those with lower incomes and minorities.
His statement was: “We know that high inflation can cause significant hardship, particularly on the poorest people unable to afford essentials such as food, housing, transportation.” The best way we can support strong labor markets is to encourage long-term growth, which is only possible when prices are stable.
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%.