Federal Reserve Chairman Paul Powell said in economic testimony to the House Financial Services Committee on Wednesday that the Fed will start raising interest rates this month despite “uncertainty” over the prospect of the Russia-Ukraine war , to stem soaring inflation, and to start shrinking its balance sheet following raising interest rates for an undetermined time. Powell backed a quarter-point rate hike in March, not ruling out a sharp hike at some stage.
Monetary policy meeting to start raising interest rates later
At the hearing, Powell reiterated the Fed’s core view that rate hikes are needed amid high inflation and an “extremely tight” labor market, saying: “We expect to raise the target range for the federal funds rate at our meeting later this month. would be appropriate”. Powell is leaning toward raising rates by 0.25 percentage points in March.
Most Fed officials have said they hope to raise the benchmark interest rate by 0.25 percentage points in March, and some officials have signaled that a larger rate hike is acceptable.
Powell’s testimony on Wednesday set the stage for a bigger-than-expected rate hike, saying: “If inflation remains above 2% or remains high, rate hikes will be at one or more meetings later in the year. more than 0.25 percentage points.”
The balance sheet shrinking will follow the rate hike but the timing is uncertain
Ball said it will start shrinking by regarding 9 trillion later this yearDollarbalance sheet, but will not finalize the plan at a later monetary policy meeting. Ball said the balance sheet reduction would be done “in a predictable manner,” where some of the bonds would not be invested but sold as they matured.
Inflation expected to peak and fall this year
Powell said at the hearing that while consumer prices have risen well beyond the Fed’s 2% target, with the U.S. consumer price index (COI) rising to an annualized 7.5% in January, and lasting longer than expected, Inflation will peak this year and start to fall as tangled supply chains ease, monetary policy tightens, and the fiscal stimulus of the past two years fades, demand moderates, and consumers trim spending slightly.
The impact of the Russian-Ukrainian conflict
The Fed typically avoids measures that increase uncertainty during times of geopolitical risk, but with U.S. inflation well above its 2% target and the potential for a Russian-Ukrainian conflict to push up prices, the Fed is feeling bigger rate hikes pressure.
Powell said the Russia-Ukraine conflict might add to price pressures as well as undercut economic growth, presenting the Fed with new complications, adding: “The near-term impact of sanctions and future events on the U.S. economy remains highly inconsistent with the ongoing conflict in Russia and Ukraine. Certainty, appropriate monetary policy in this environment, must understand that the economy is developing in unexpected ways, and therefore adopt a more flexible approach to new data and changing conditions.”
Market attitude
The CME FedWatch Tool shows that the market has fully priced in the expectation of a rate hike at the Fed’s monetary policy meeting on March 15-16, but since the war between Russia and Ukraine, the market is expecting a rate hike at the subsequent meeting this year. has declined.
Traders currently estimate that the Fed may raise interest rates five times, raising the benchmark rate to 1.25%-1.5% from the current range of 0%-0.25%.
