Fed’s monetary policy on track despite ‘uncertain’ impact of Ukraine war, says Powell

The Federal Reserve (Fed) will go ahead with its plans to raise interest rates this month to try to control high inflation, but the outbreak of war in Ukraine has made the outlook “very uncertain”, said Fed Chairman Jerome Powell.

In comments prepared for his testimony before the House Financial Services Committee, Powell reiterated the Fed’s core narrative that high inflation and a labor market “extremely tight” justify the rate hike.

“We hope it will be appropriate to raise the target range for the fed funds rate at our meeting this month.Powell said, adding that the Fed will carry out reductions in its portfolio of government-backed assets of about $8.5 trillion this year.

But in his opening statement, Powell he gave no clue as to the speed of the pace of rate hikes. He added that Fed officials still expect inflation to ease later this year, and framed the start and end of his remarks with developments in Ukraine.

The impact of the coronavirus pandemic on the economy appears to be easing, he said, hiring remains strong, and inflation has emerged as the main risk.

Inflation “is now well above our long-term target of 2%. Demand is strong, and bottlenecks and supply constraints are limiting how quickly production can respond”, maintained the head of the Fed.

He added that those supply interruptions had been “larger and longer lasting than anticipated”, and reaffirmed the Federal Reserve’s promise to be as strict as necessary to get prices back on track.

Although some of those inflationary pressures are expected to abate throughout the year, “we are alert to the risks of possible additional upward pressures”.

Powell also acknowledged the new complexity facing the Fed from events in Europe, which have the potential to both increase price pressures and undermine growth.

“The short-term effects on the US economy of the invasion of Ukraine, the ongoing war, the sanctions, and the events ahead remain highly uncertain. We will need to be agile to respond to incoming data and evolving outlooks“, he pointed.