Interest rates

Powell signals Fed will raise interest rates at March meeting

Fed Chairman Jerome Powell said on Wednesday that the central bank intended to raise its key rate after the end of its two-day meeting on March 16, despite uncertainties related to the Russian invasion of the Ukraine.

“With inflation well above 2% and a strong labor market, we believe it will be appropriate to raise the target range for the federal funds rate at our meeting later this month,” Powell said, in remarks prepared for delivery to House Financial Services. Committee.

The prepared remarks were released at 8:30 a.m. Eastern Time. Powell will take questions from lawmakers shortly after 10 a.m.

In his remarks, Powell did not comment on the magnitude of the expected rate hike.

Most economists believe the Fed will raise rates by a quarter point at the March meeting. Speculation of a half-percentage-point hike faded following Russia’s invasion of Ukraine.

The Fed is expected to continue raising rates throughout the year. The central bank’s policy rate has remained close to zero since the coronavirus pandemic hit in early 2022 to help the economy weather the storm. With inflation soaring, central banks want – in the first place – to bring rates closer to “neutral” or around 2.5%, in orderly and regular steps.

Powell said the Fed will have to be “agile” in executing monetary policy.

The Fed has a second tool to cool the economy: shrink the size of its balance sheet by nearly $9 trillion.

Powell didn’t provide many details about the tool, saying it would start “after the process of raising interest rates has begun.”

The Fed wants to shrink its balance sheet “in a predictable way” by mostly letting maturing securities out of its portfolio, rather than selling outright, he said.

Inflation

In his prepared testimony, Powell said the Fed continues to expect lower inflation over the year, reduced “as supply constraints ease and demand moderates due to diminishing effects of fiscal support and the removal of accommodative monetary policy”.

At the same time, the central bank is alert to the risks that the public will come to expect higher inflation and that prices may rise due to a number of factors.

“We will use our policy tools appropriately to prevent higher inflation from taking hold while promoting a sustainable expansion and a strong labor market,” Powell said.

Consumer price inflation rose 7.5% for the 12 months to January, the biggest increase since 1982.

Some Fed officials have speculated that the war in Ukraine will lead to higher inflation.

Last year, Powell and his team thought inflation would be “transient” because price gains appear to be tied to pandemic-related spending. Production struggled to meet high demand due to bottlenecks and supply constraints.

“These supply disruptions have been larger and longer lasting than expected, exacerbated by waves of the virus, and price increases are now spreading to a wider range of goods and services,” Powell said.

On Tuesday evening, during his State of the Union address, President Joe Biden called controlling inflation his “top priority”.

Read: Biden outlines measures to fight inflation

Ukraine

Powell said the U.S. economy could evolve in unexpected ways from the Ukraine conflict and the ensuing draconian sanctions imposed on the Russian economy.

“The near-term effects on the U.S. economy of the invasion of Ukraine, the ongoing war, sanctions, and future events remain highly uncertain,” Powell said.

Powell said the rapid spread of the omicron variant caused some slowdown in US economic activity earlier this year, but added that “the slowdown appears to have been brief” as cases have fallen sharply since mid- January.

DJIA Stocks,
-1.76%

SPX,
-1.55%
were expected to open higher on Wednesday, but gains were pared after Powell’s remarks were released. The 10-year Treasury yield TMUBMUSD10Y,
1.767%
rose slightly.