Powell Sees Fed Rate Liftoff in March While Ukraine Fogs Outlook By Bloomberg

(Bloomberg) -- Federal Reserve Chair Jerome Powell said the central bank expects to raise interest rates later this month to tackle hot inflation amid a tight labor market while Russia’s invasion of Ukraine has added uncertainty to the U.S. outlook.

“With inflation well above 2% 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 Wednesday in remarks prepared for his appearance before the House Financial Services Committee. “The process of removing policy accommodation in current circumstances will involve both increases in the target range of the federal funds rate and reduction in the size of the Federal Reserve’s balance sheet.”

The hearing is scheduled to begin at 10 a.m. in Washington. 

Powell said the labor market is “extremely tight,” essentially a message to lawmakers that the central bank has met its maximum employment goal in current conditions, which opens the door to its inflation fight. He said employers are having difficulties filling job openings, while workers are quitting and taking new jobs helping wages rise at the fastest pace in years. 

“We know that the best thing we can do to support a strong labor market is to promote a long expansion, and that is only possible in an environment of price stability,” Powell said, restating a line he has used several times now that interprets the inflation fight in terms of preserving the expansion.

‘Highly Uncertain’

Financial markets have reeled since Russia’s invasion of Ukraine, sending energy prices jumping and potentially pushing inflation higher, even as heightened tensions cloud the outlook for global growth. Even so, interest-rate futures markets are fully priced for a quarter point interest-rate increase later this month and several Fed officials speaking since the invasion have said they are still inclined to act.

Powell cautioned, however that 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.”

“Making appropriate monetary policy in this environment requires a recognition that the economy evolves in unexpected ways,” he said. “We will need to be nimble in responding to incoming data and the evolving outlook.”

No Timing

The Fed chair gave no timing on balance-sheet reduction, a decision that is likely still pending for the Federal Open Market Committee. After rate increases start, trimming assets “will proceed in a predictable manner primarily through adjustments to reinvestment,” he said. 

Powell, whose confirmation for a second term has been stalled by Republican opposition to President Joe Biden’s selection of Sarah Bloom Raskin to be vice chair for supervision, faces the challenge of pivoting policy to confront the highest inflation in 40 years, while not tightening so much that the economy stalls. 

Critics, including some Republican lawmakers, say the U.S. central bank has been too slow to act.

The Fed’s preferred gauge of price movements rose at a 6.1% annual pace in January, triple the central bank’s 2% target. Demand remains strong with growth forecasts centering around 2.9% this year, according to estimates tallied by Bloomberg, while companies continue to add employees at a robust pace. Meanwhile, some of Powell’s colleagues see an urgent need to raise rates, with Governor Christopher Waller calling for 100 basis points of tightening by midyear.

Dot Plot

Fed officials will release fresh quarterly estimates for interest rates and the economy at their March 15-16 meeting, offering some guidance for how far and fast they expect to tighten policy in the coming months.

The Fed’s intent to remove its emergency pandemic support, as well as the invasion of Ukraine, have taken a toll on financial markets. The S&P 500 is down 9.6% this year while 10-year Treasury yields have fallen sharply in recent days, reflecting perceived risks to growth as well as investors seeking the security of safe havens.

The Fed chair follows his remarks today with an appearance before the Senate Banking Committee Thursday, where Powell is waiting for a confirmation vote together with Biden’s four other nominees for the Fed. 

Committee chair Sherrod Brown, a Democrat from Ohio, plans to try to hold another vote on Wednesday after Republicans boycotted the first one in an effort to block Raskin, who they say has failed to answer all their questions.

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