Powell tells Congress that Fed will raise rates this month
Federal Reserve Chair Jerome Powell made clear Wednesday that the Fed will begin raising interest rates this month in a high-stakes effort to restrain surging inflation.
In prepared testimony he will deliver to a congressional committee, Powell cautioned that the economic consequences of Russia’s invasion of Ukraine are “highly uncertain.” He says the Fed will “need to be nimble” in responding to unexpected changes resulting from the war or the sanctions that the United States and Europe have imposed in response.
The Fed is widely expected to raise its benchmark short-term interest rate several times this year beginning with its March 15-16 meeting. In his testimony, Powell provided little additional guidance about how quickly the Fed would do so.
A rate hike next month would be the first since 2018. And it would mark the beginning of a delicate challenge for the Fed: It wants to increase rates enough to bring down inflation, which is at a four-decade high, but not so fast as to choke off growth and hiring. Powell is betting that with the unemployment rate low, at 4%, and consumer spending healthy, the economy can withstand modestly higher borrowing costs.
When the Fed raises its short-term rate, borrowing costs also typically rise for a range of consumer and business loans, including for homes, autos and credit cards.
Powell acknowledged that consumer price increases have jumped far above the Fed’s target of 2% — inflation hit 7.5% in January compared with a year earlier — and that higher prices had persisted longer than expected.
“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,” the Fed chair says in his testimony to the House Financial Services Committee on the first of two days of semiannual testimony to Congress.
Still, he adds that the central bank expects inflation to gradually decline this year as tangled supply chains unravel and consumers pull back a bit on spending.
Most economists agree that inflation will likely decline from its current high level. Yet they increasingly expect it to stay elevated. Rising prices are spreading beyond items that were disrupted by the pandemic — autos, electronics, furniture and other household goods — into broader categories of spending, especially rental costs.
Goldman Sachs has raised its forecast for inflation and now predicts that prices, according to the Fed’s preferred measure, will still be rising at a relatively high annual rate of 3.7% by year’s end. That is far above the Fed’s own most recent projection, issued in December, of 2.7%. When the central bank’s policymakers meet in two weeks, they will update that projection.
In his testimony Wednesday, Powell said the Fed will also begin reducing its huge $9 trillion balance sheet, which more than doubled during the pandemic when the Fed bought trillions of dollars of bonds to try to hold down longer-term rates. The Fed chair said only that the reduction would begin after rate hikes were initiated. Shrinking the Fed’s balance sheet has the effect of further raising longer-term borrowing costs.
In public statements, central bank officials have been debating whether to raise rates this month by a half-percentage point — an aggressive move — though most have backed a traditional quarter-point increase. Russia’s invasion of Ukraine has made a half-point increase even less likely.
The Fed has typically avoided raising rates at all during international crises and has often cut them in response. But with inflation at such high levels, most analysts expect the central bank to carry out four or five hikes this year.
Even so, with Russia’s invasion likely to disrupt the U.S. and global economies in unpredictable ways, the Fed may not tighten credit conditions as much as had been expected. Wall Street investors now forecast roughly five increases this year, based on pricing in futures markets, down from seven rate hikes that they had predicted before the invasion.
On Tuesday, the yield on the 10-year Treasury note tumbled to 1.71%, in part because financial markets now foresee fewer rate hikes. The yield also fell because investors around the world piled into Treasuries as a “safe haven” investment, pushing up Treasury prices and lowering yields.