Mar 2, 2022 - Economy

Powell: Quarter point rate hike is a go, despite war

Federal Reseve chair Jerome Powell

Chair Powell faces the Houes Financial Services Committee. Photo: Win McNamee/Getty Images

Federal Reserve chair Jerome Powell offered a strikingly blunt description of the Fed's plans for its policy meeting later this month.

  • Powell said at his semi-annual Congressional testimony Wednesday that he's inclined to proceed with a quarter-percentage point interest rate increase in two weeks, while moving carefully and watching the economic implications of the war in Ukraine.

Why it matters: For weeks, Fed officials have faced questions about whether they would begin their monetary tightening campaign with the customary quarter-point at a time rate increases, or move faster to try to choke off soaring inflation. Powell has firmly put himself on the side of caution, particularly in light of the conflict in Europe.

  • In effect, the outbreak of war was not enough to call off the tightening campaign, but seems to have reduced the appeal of a more aggressive rate hike that might disrupt markets.
  • "The bottom line is we will proceed, but we will proceed carefully as we learn more about the implications of the Ukraine war for the economy," Powell told the House Financial Services Committee. "We will avoid adding uncertainty to what is already an extraordinarily challenging, uncertain environment."

The Fed will also discuss plans for how to shrink the Fed's $9 trillion balance sheet at the meeting March 15-16, though it won't finalize those plans until later in the year. That amounts to a second tool to tighten monetary policy and remove liquidity from the financial system.

The big picture: The Ukraine war is creating a stagflationary shock for the world economy, which leads to a bind for the Fed. It stands to undermine growth, especially in Europe, while also causing soaring commodity prices that will flow through to consumers in the coming months.

  • "The economic effects are highly uncertain," Powell said. "As energy prices move up, those increases will move through the economy and push up headline inflation."
  • Conversely, he said the war could cause "declining risk sentiment and weaker growth abroad" but that "we can't know how long or persistent those effects will be."

Powell acknowledged that his forecasts of inflation proving transitory last year did not materialize, and was unwilling to predict when inflation will peak. "We’re humble about the fact that we can't call with any confidence the turn," he said.

What we learned: Technically, Powell is currently the "Chair Pro Tempore," because his term as the central bank's top leader has expired while the Senate considers confirming him for a second term. (Also, nobody knows how to pronounced "pro tempore.")

The bottom line: Powell is betting that steady-as-she-goes is the best stance for the central bank during this uncertain time.

Go deeper