Federal Reserve chairman Jerome H. Powell told lawmakers on Wednesday that the central bank is poised to raise interest rates from near zero at its meeting later this month as it works to cool high inflation — even as the conflict in Ukraine increases uncertainty.
“We expect it will be appropriate to increase the target range for the federal fund rate at our meeting later this month,” said Mr. Powell during a testimony before the House Committee on Financial Services. He noted that the Fed will target a “predictable” contraction in its large bond holdings after raising interest rates, a move that will draw additional strength from the economy.
While Fed officials are willing to use their policies to make money increasingly expensive in an effort to slow consumer and business demand in the hopes of cooling off today’s rapid prices, Mr Powell added that the central bank must be ready to respond to the Russian invasion of Ukraine looms.
“The short-term effects on the US economy of the invasion of Ukraine, the ongoing war, sanctions and upcoming events remain highly uncertain,” he said. “We will need to be agile in responding to incoming data and the changing outlook.”
Mr. Powell portrayed the geopolitical upheaval as creating a sense of caution, rather than predicting what it might mean for policy. Economists have said the conflict is likely to push gas prices up, pushing inflation further, but that a combination of higher fuel costs and hesitant consumer confidence could hurt economic growth.
Understanding inflation in the US
“We will be monitoring the situation closely,” said Mr. powell.
The Fed chairman is technically on a pro-tempo basis pending Senate confirmation for a second term — a vote that has been postponed because Republicans are boycotting one of President Biden’s other nominees to the Fed. He testifies before the House on Wednesday and before the Senate on Thursday at a tense political and economic moment, as war rages abroad and inflation dominates the headlines and terrifies consumers at home.
Mr Powell also spoke of a positive aspect of the current economy: growth has been strong and there are abnormally many jobs.
“The job market is extremely tight,” said Mr. powell. He added that “employers are struggling to fill job openings, an unprecedented number of workers are leaving to take on new jobs, and wages are rising at the fastest pace in many years.”
Some of that progress has been clouded by high inflation. In his State of the Union address Tuesday night, Biden called fighting high prices his “top priority,” a sign of how central it has become in the national debate.
Prices are rising at the fastest pace in 40 years, rising 7.5 percent over the year ended January in the closely monitored consumer price index and 6.1 percent as measured by the Fed’s favorite inflation gauge, the index for inflation. personal consumption expenses. The central bank aims for an average inflation rate of 2 percent over time.
Frequently asked questions about inflation
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar won’t go as far tomorrow as it did today. It is usually expressed as the annual price change for everyday goods and services such as food, furniture, clothing, transportation, and toys.
“Demand is strong and bottlenecks and supply constraints are limiting the speed with which production can respond,” said Powell. “These supply disruptions are larger and longer-lasting than expected, exacerbated by waves of the virus, and price increases are now spreading to a wider range of goods and services.”
Mr Powell said the Fed still expects inflation to cool this year as pandemic relief spending declines, interest rates rise and supply constraints lift, but it is closely monitoring factors that could keep inflation high. .
“We will use our policy tools where necessary to avoid anchoring higher inflation while promoting sustainable expansion and a strong labor market,” said Mr Powell.
