Hike rates

Powell Signals Fed Will Hike Rates This Month Despite Ukraine Uncertainty

Federal Reserve VSHairdresser Jerome Powell said the central bank plans to raise interest rates for the first time in years this month despite uncertainty over the devolved situation in Ukraine.

During a hearing before the House Financial Services Committee on Wednesday, Powell was asked how the Russian invasion of Ukraine would affect the rate and magnitude of interest rate hikes this year. Powell said that despite the war, raising the federal funds rate is crucial because inflation is soaring.

“Ultimately, we will continue, but we will proceed with caution as we learn more about the implications of Ukraine’s war for the economy,” Powell told lawmakers about the country’s monetary policy plans. fed. “We will avoid adding uncertainty to what is already an extraordinarily difficult and uncertain environment.”

Consumer prices rose 7.5% in the 12 months to January, the fastest pace of inflation in four decades. Prices rose for a wide range of items, including housing, cars and groceries.

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After the hotter-than-expected January inflation numbers, some Fed watchers began betting that the central bank would decide to hike half a percentage point at the monetary policy committee meeting. in March rather than the typical quarter-percentage-point hike, which would essentially be the implementation of two rate hikes at once. It would be the first time the Fed has taken such an extreme decision in more than two decades.

Powell threw some cold water on that notion on Wednesday and said he was rather “inclined to propose and support a 25 basis point rate hike.”

Just a week ago, before the Russian invasion, markets were pricing in a roughly 33% chance of a half-point upside. After Powell’s testimony, there seems to be a 0% chance of such an extreme move being made right out of the gate.

But Powell did not close the door to more aggressive rate hikes this year if inflation remained consistently and stubbornly high.

“To the extent that inflation is higher or higher than that, we would be prepared to act more aggressively,” he said of the prospect of raising rates by half a point. at one or more other meetings of the Federal Open Market Committee. Later this year.

Russia invaded Ukraine less than a week ago and continues its assault on major Ukrainian cities, including the capital Kyiv, despite huge and crippling sanctions imposed against it by the United States and other Western powers. . There are fears that a prolonged or extensive war in Europe could disrupt global markets and put the Fed in a more precarious position with respect to upward revisions to the fed funds rate.

“The short-term effects on the U.S. economy of the invasion of Ukraine, the ongoing war, sanctions, and future events remain highly uncertain,” Powell told the committee. “Developing appropriate monetary policy in this environment requires recognizing that the economy is changing in unexpected ways. We will need to be nimble to respond to incoming data and changing outlooks.

The Russian economy languished under the weight of the new sanctions regime. The rouble, Russia’s currency, is now worth less than 1 cent as Russians storm banks to withdraw cash.

Meanwhile, the economic situation in Russia has been so calamitous that trading on the Moscow Stock Exchange has been halted since last week. It is unclear when regulators plan to reopen trading. The day after the invasion, the MOEX Russia index crashed by up to 45%.

While Powell, a Republican, enjoys bipartisan support for his presidency and was reappointed to the position by President Joe Biden last year, the Fed has faced backlash from Republicans and even from some Democratic economists for her handling of inflation.

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Some believe the Fed should have acted sooner to unwind its unprecedented asset purchase program and ultra-loose monetary policy months ago as Congress ramped up spending.

The highly anticipated FOMC meeting will take place this month in Washington, DC on March 15-16.