The Federal Reserve is so far sticking to its plan to raise the benchmark interest rate later this month in order to fight inflation, Chairman Jerome Powell signaled Wednesday, though the central bank is clearly keeping its options open as the Russian invasion of Ukraine plays out on the economy.
“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,” Powell told the House Financial Services Committee. “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.”
Given how well the job market is recovering but also how high inflation is, the central bank must shift from economic stimulus mode to inflation-fighting mode, Powell said, reiterating what he and other Fed officials have said of late. But he also said they would be “monitoring the situation closely,” bracing for the possibility that the war in Ukraine could require a change of course.
The central bank’s main inflation-fighting tool is the benchmark fed funds rate, which influences all kinds of other borrowing costs throughout the economy. Consumers can expect higher interest rates on mortgages, credit cards, and other financial products when it goes up from the near-zero levels it’s been pegged at since the pandemic hit.
The Fed typically raises the target for the fed funds rate by 0.25 percentage points at a time, and Powell said he was “inclined” to support a standard quarter-point rate hike when the Fed next meets March 15-16. But he left room for bigger increases if the inflation rate remains stubbornly high. If interest rates go up, it becomes more expensive to borrow money to purchase things, so demand for goods and services should go down, so the theory goes. That, in turn, reduces inflation.
“Those of us on the committee have an expectation that inflation will peak and begin to come down this year,” Powell said. “And to the extent inflation comes in higher or is more persistently high than that, then 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.”
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