Fed Chair Powell notes ‘highly uncertain’ Ukraine impact, but says

Federal Reserve Chairman Jerome Powell still sees interest rate hikes coming, but noted Wednesday that the Russia-Ukraine war has injected uncertainty into the outlook.

In remarks prepared for dual appearances this week before House and Senate committees in Congress, the central bank chief acknowledged the “tremendous hardship” the Russian invasion of Ukraine is causing.

“The implications for the U.S. economy are highly uncertain, and we will be monitoring the situation closely,” Powell said.

“The near-term effects on the U.S. economy of the invasion of Ukraine, the ongoing war, the sanctions, and of events to come, remain highly uncertain,” he added. “Making appropriate monetary policy in this environment requires a recognition that the economy evolves in unexpected ways. We will need to be nimble in responding to incoming data and the evolving outlook.”

The observations come amid 40-year highs for inflation in the U.S., complicated by a Ukraine war that has driven oil prices to around their highest levels in a decade. Consumer prices increased 7.5% from a year ago in January, and the Fed’s preferred inflation gauge showed its strongest 12-month gain since 1983.

Powell and his fellow policymakers have been indicating for weeks that they plan to start raising benchmark interest rates to tackle inflation. He reiterated the stance Wednesday that the process will involve “interest rate increases,” along with indications that the Fed eventually will start reducing its bond holdings.

“We will use our policy tools as appropriate to prevent higher inflation from becoming entrenched while promoting a sustainable expansion and a strong labor market,” he said. “We have phased out our net asset purchases. With inflation well above 2 percent and a strong labor market, we expect it will be appropriate to raise the target range for the federal funds rate at our meeting later this month.”

Powell said the likely path for rate hikes will be increments of a quarter percentage point, though he said he would be open to more aggressive moves if inflation gets worse.

“We’re going to avoid adding uncertainty to what is already an extraordinarily challenging and uncertain moment,” he said under questioning from House Financial Services Committee members. “To the extent that inflation comes in higher or is more persistently high than that, we would be prepared to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings.”