Fed chairman says he will propose 0.25 interest rate hike in March

Federal Reserve Chairman Jerome Powell said on Wednesday that he is “inclined to propose and support a 25 basis point increase” at the US central bank’s March monetary policy meeting, but said it is “prepared to act more aggressively” if inflation does not decline as expected.

In remarks that cited the context of the war in Ukraine, Powell told the US House of Representatives Financial Services Committee that the economic outlook has become “highly uncertain” and that the US central bank wants to “proceed with caution” as it changes. monetary policy in an already complicated situation.

But while his remarks at the March 15-16 meeting ended the debate over the Fed’s initial step of tightening monetary policy, Powell said that doesn’t mean the central bank won’t act more quickly in the future. .

“We will proceed with caution as we learn more about the economic consequences of the Ukraine war,” Powell said in his testimony. “We expect inflation to peak and start to fall this year. As inflation gets higher or more persistently high… we would be prepared to act more aggressively, raising fed funds (interest rates) basic) by more than 25 basis points in a meeting or meetings.”

The Fed has kept its overnight interest rate close to zero since cutting it to that level in 2020 to protect the economy from the impact of the coronavirus pandemic.

At the start of his hearing before the House committee, Powell answered a series of questions about the war in Ukraine. He said the U.S. central bank had begun analyzing scenarios for possible impacts, but there was still nothing in the data to justify a change in the Fed’s monetary policy shift, which has been planned since late last year in response to above-than-average inflation. expected.

In his testimony, Powell reiterated the Fed’s main narrative that high inflation — which is at about three times the central bank’s 2% rate target — and an “extremely tight” labor market necessitate higher interest rates. high.

The impact of the coronavirus pandemic on the economy appeared to ease, the Fed chair told lawmakers, as hiring remained strong and inflation emerged as the main risk.

Inflation “is now well above our long-term objective of 2%. Demand is strong, and bottlenecks and supply constraints are limiting how quickly production can respond,” Powell said.

He added that these supply disruptions were “bigger and longer lasting than anticipated” and reaffirmed the central bank’s pledge to be as tough as necessary to control prices.

While some of these current inflationary pressures are expected to ease later this year, “we are aware of the risks of possible further upward pressure. We will use our monetary policy tools as appropriate to prevent higher inflation from taking root.”

However, Powell also acknowledged the new complexity facing the Fed with the situation in Europe, which has the potential to increase price pressures but also possibly dampen growth.

“The short-term effects on the US economy of the invasion of Ukraine, the ongoing war, sanctions and future events remain highly uncertain,” he said. “Making appropriate monetary policy in this environment requires recognizing that the economy is evolving in unexpected ways. We will need to be agile in responding to upcoming data and evolving prospects.”