War could boost inflation, reduce US investment, says Powell

Russia’s war on Ukraine could hit the US economy through a variety of channels, from higher prices to reduced spending and investment, Federal Reserve Chairman Jerome Powell, although it’s unclear what the ultimate impact will be.

“What we know so far is that commodity prices have gone up significantly, energy prices in particular. This is going to affect our US economy” in the form of higher inflation at least in the short term, Powell told the Senate Banking Committee.

“Also, we might see a decline in pro-risk sentiment, so you might see less investment. You might see people holding back on spending. It’s hard to see what the effect will be on both supply and demand.”

Powell repeated his Wednesday remarks to a House committee whose members also focused on questions about the Russian invasion. The conflict triggered sweeping sanctions against Moscow.

Powell said the Fed is watching the situation carefully and has begun to run simulations, for example, on the effect that persistent increases in oil prices could have on the economy.

According to Powell, the jump in oil from about $75 a barrel in late December to about $110 a barrel on Thursday, if it lasts, could add nearly 0.9 percentage points to inflation and cut nearly 0. 5 percentage points off economic growth, bad dynamics as the central bank tries to reduce inflation without hurting employment.

But Powell said the war has so far not changed the central bank’s plans to raise rates from its March meeting to try to slow the pace of price increases, with the inflation rate currently at three times the annual target. of 2% from the Fed.

“It’s only appropriate that we continue along the lines we had in mind before the Ukraine invasion,” Powell said.

The Fed chairman repeated that he would support an initial 0.25 percentage point increase in the Fed’s benchmark interest rate at the March 15-16 meeting.

But if inflation doesn’t cool, Powell said, “we are prepared to raise more than that magnitude in a meeting or meetings.”

But lawmakers focused on the new situation the Fed now faces and the possibility that the central bank is facing a tougher scenario in which inflation is driven by the war while growth slows.

“I’m a little concerned that this war has changed the risk profile,” said Senator Pat Toomey, a Republican from Pennsylvania.

“On both the supply and demand sides, there’s a lot of uncertainty,” Powell said, also noting that the “strong financial situation” of households and businesses could help sustain spending.

Fed’s Mester Says War Doesn’t Change Need to Raise Rates

Cleveland Federal Reserve Chair Loretta Mester said on Thursday that Russia’s invasion of Ukraine “does not change the need” for the US central bank to start raising interest rates.

In fact, she said, this raises upside risks for “already extremely high inflation.”

“Starting with (a rise of) 25 (basis points), followed by more increases in the coming months, that puts us in a good position,” Mester said in an interview with CNBC.

She added that she expected inflation to fall to 3.5% to 4% by the end of the year.

If inflation doesn’t decline as expected by mid-year, after several rate hikes and the beginning of the Fed’s balance sheet reduction, “this will be a signal to me that we have to remove stimulus at a stronger pace, a faster pace”.