Fed expects inflation to decline over the course of the year
Fed Chairman Jerome Powell on Wednesday said the central bank intends to raise its policy interest rate following the end of its two-day meeting on March 16, despite uncertainties from the Russian invasion of Ukraine.
“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, in remarks prepared for delivery to the House Financial Services Committee.
The prepared remarks were released at 8:30 a.m. Eastern. Powell will take questions from lawmakers shortly after 10 a.m.
In his remarks, Powell didn’t comment on the size of the planned rate hike.
Most economists think the Fed will hike rates by a quarter-point at the March meeting. Speculation of a half-percentage point hike has waned in the aftermath of Russia’s invasion of Ukraine.
The Fed is expected to continue to raise rates throughout the year. The central bank’s policy rate has been stuck near zero since the coronavirus pandemic struck in early 2022 to help the economy weather the storm. With inflation surging, the central banks wants — as the first order of business — to get rates closer to “neutral” or around a 2.5% rate, in orderly and regular steps.
Powell said the Fed will have to be “nimble” in its execution of monetary policy.
The Fed has a second tool to cool the economy – shrinking the size of its almost $9 trillion balance sheet.
Powell did not provide much specifics on this tool, saying that it would begin “after the process of raising interest rates as begun.”
The Fed wants to shrink its balance sheet “in a predictable manner” primarily letting maturing securities run off of its portfolio, rather than outright sales, he said.
Inflation
In his prepared testimony, Powell said the Fed continues to expect inflation to decline over the course of the year, pulled down “as supply constraints ease and demand moderates because of the waning effects of fiscal support and the removal of monetary policy accommodation.”
At the same time, the central bank is attentive to risks that the public will come to expect higher inflation and that prices may increase due to a number of factors.
“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,” Powell said.
Consumer price inflation rose 7.5% for the 12 month ending January, the largest increase since 1982.
Some Fed officials have speculated the war in Ukraine would cause inflation to go higher.
Last year, Powell and his team thought that inflation would be “transitory” because the price gains seems to be related to pandemic spending. Production had trouble meeting strong demand due to bottlenecks and supply constraints.
“These supply disruptions have been larger and longer lasting than anticipated, exacerbated by waves of the virus, and price increases are now spreading to a broader range of goods and services,” Powell said.
On Tuesday night during his State of the Union speech, President Joe Biden called getting inflation under control his “top priority.”
Ukraine
Powell said the U.S economy could evolve in unexpected ways from the Ukraine conflict and the subsequent draconian sanctions placed on the Russian 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 high uncertain,” Powell said.
Powell said the rapid spread of the omicron variant had led to some slowing in U.S. economic activity early this year, but added “the slowdown seems to have been brief” as cases have declined sharply since mid-January.
Stocks were set to open higher on Wednesday. The yield on the 10-year Treasury has fallen to 1.766% after rising above 2% on some safe-haven trading due to the war on the doorstep of Europe.
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