US Central Bank (Fed) Chairman Jerome Powell during his congressional hearing on March 2, 2022 in Washington. (AFP/Stefani Reynolds)
The “consequences” of the war in Ukraine for the American economy are “very uncertain” but that will not prevent the American Central Bank from raising its key rates in two weeks, said Wednesday Jerome Powell, the president of the institution. .
“The conflict is causing enormous difficulties for the Ukrainian people,” lamented the head of the Federal Reserve (Fed) during a hearing before the House of Representatives. “The short-term effects on the US economy of the invasion of Ukraine, the ongoing war, the sanctions, and future events, remain highly uncertain.”
He observed that U.S. financial institutions and the economy have “not great interactions with the Russian economy.” Sanctions once morest Moscow “should therefore not have a direct impact” on the United States, he argued. But it is “difficult to predict the side effects”.
“We will be monitoring the situation closely,” he also said, stressing that the Fed would show “great flexibility” depending on how the outlook for the world’s largest economy changes.
“Making appropriate monetary policy decisions” in the context of war in Ukraine, draconian economic sanctions imposed by the United States and others on Russia and unpredictable events “requires admitting that the economy is changing in unexpected ways “, he conceded.
However, he considers it “appropriate” to raise key rates at a meeting on March 15 and 16, given the record inflation.
He also clarified that he would propose an increase of a quarter of a percentage point (0.25 point) in rates, a moderate increase justified in the context.
– “Price stability” –
But if inflation turns out to be higher, “we would be prepared to act more aggressively by raising rates by more than 25 basis points (0.25 percentage points) at a subsequent meeting or meetings” within the year, he added.
Since March 2020, the key rates have been in a range between 0% and 0.25%.
The invasion of Ukraine by Russia seriously complicates the task of the powerful American financial institution because it comes at a time when prices, in particular of energy, were already very high all over the world.
A situation linked to insufficient supply and a strong recovery in international demand following the lifting of restrictions once morest the Covid-19 pandemic in many countries.
In its Beige Book, a monthly survey of American companies and published on Wednesday, the Fed notes that in February, the problems of logistics and labor shortages continued.
Rising labor and material costs have further fueled inflation, which is at its highest for 40 years.
Before the conflict in Eastern Europe, some economists were expecting a sharp rise in March.
– “Soft landing” –
But Mr Powell urged caution given the context. However, he said he was convinced of the Fed’s ability to carry out a “soft landing”, ie to “control inflation without causing a recession”.
The President of the American Central Bank (Fed) Jerome Powell before Congress on March 2, 2022. According to him, “the consequences” of the war in Ukraine for the American economy are “very uncertain”. (AFP/Stefani Reynolds)
For now, he recalled that in the United States, “economic activity had resumed at a steady pace of 5.5% last year, reflecting progress in vaccinations and the reopening of the economy”, but also the support of the Fed and the government.
In addition, “the labor market is extremely tight” with significant labor shortages and wages rising “at their fastest pace in many years”, he notes.
Combined with an unemployment rate that has fallen considerably over the past year, standing at 4% in January, and excluding the war in Ukraine, all the conditions are in place for a series of rate hikes this year.
“We know that the best thing we can do to support a strong labor market is to promote sustainable expansion, and this is only possible in an environment of price stability,” said Jerome Powell.
Finally, he reiterated that the Fed expects inflation to slow “during this year as supply constraints (easing) and demand (moderate)”. But he was cautious: “We are humbled that we cannot really predict with certainty when the turning point will be”.
