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 at the March 15-16 meeting from current levels near zero and several Fed officials speaking since the invasion have said they are still inclined to act.
Interest rate futures are still pricing in about five rate increases for 2022 starting this month—which will mark the first hike since 2018. U.S. stocks advanced in early trade Wednesday.
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.”
“Powell clearly signaled a rate hike for March, but he did not specify the size,” said Stephen Stanley, chief economist at Amherst Pierpont Securities LLC. “Powell also acknowledged that the Fed is likely embarking on a series of rate hikes, noting that removing policy accommodation will entail ‘increases in the target range of the federal funds rate.’”
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 said he continues to expect inflation to decline over the course of the year as supply constraints ease and demand cools off in the wake of waning fiscal support and higher interest rates.