The time of ultra-low interest rates has come to an end. That’s what Federal Reserve Chair Pro Tempore Jerome Powell told lawmakers this week as part of his semiannual testimony.
“Our monetary policy has been adapting to the evolving economic environment,” Powell told the House Committee on Financial Services Wednesday. “We have phased out our net asset purchases. 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.”
This is in line with the Fed’s previous guidance. At the January policy meeting, Powell first hinted at a potential interest rate increase in the spring.
“I’m inclined to propose a 25 basis point rate hike,” Powell said Wednesday, in response to a question from Rep. Patrick McHenry.
Investors are on board as well, and market expectations for a quarter-percentage-point hike are above 90%, according to the CME FedWatch tool.
“If we don’t see inflation behaving in the way we expect it to behave,” meaning that it will peak and then come down, “then we’re prepared to raise by more than that amount in a meeting or meetings,” Powell added on Thursday during his testimony before the Senate Banking Committee.
Despite the Omicron variant slamming America over the turn of the year, job growth has remained intact, while inflation continued to climb higher. In the year ended January, the personal consumption expenditure price index, which is the Fed’s preferred measure of inflation, rose at its fastest pace since 1982.
Powell – along with many economists – continues to expect that inflation will come down in 2022.
“We understand that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food, housing, and transportation. 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.
The central bank is tasked with keeping prices stable and employment as high as possible. Only half of that to-do list is within reach right now.
How Ukraine could affect the Fed
Russia’s invasion of Ukraine is likely to leave a mark on inflation by way of rising energy prices. Oil futures have soared above $110 a barrel on the back of the conflict.
The question for the central bank is how the situation in Ukraine has changed the Fed’s plan for a series of interest rate increases, Powell said.
“The near-term effects on the US economy of the invasion of Ukraine, the ongoing war, the sanctions, and of events to come, remain highly uncertain,” Powell told lawmakers. “Given the current situation, we need to move carefully.”
The significant depreciation of the Russian ruble in response to the invasion also underscored that Congress needs to come up with a regulatory framework to deal with cryptocurrencies like Bitcoin that may evade economic sanctions and could serve criminal behavior, Powell said.
Wednesday’s hearing marks the first appearance for Powell as chair pro tempore. His first term as chairman has ended, but the Senate has yet to vote on his confirmation for another four-year term.