Fed Chairman Jerome Powell on Wednesday said the central bank intends to raise its policy interest rate by a quarter-percentage point 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.
Later, under questioning from lawmakers, Powell said he was inclined to support a 25 basis point move.Most economists had penciled in 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. Powell said he wanted to proceed “carefully,” which is likely a signal of further quarter-point moves. But the Fed chairman said larger rate hikes were on the table if inflation doesn’t subside.
“To the extent inflation comes in higher or is more persistently high…then we would be prepared to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings,” Powell said. 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’s comments Wednesday show the Fed doesn’t want to surprise the market with its policy moves.
Powell told the committee the Fed will have to be “nimble” in its execution of monetary policy. The Ukraine war was a big reason to move carefully, he said. The Fed has a second tool to cool the economy — shrinking the size of its almost $9 trillion balance sheet. Powell said he expects the Fed to “make progress on agreeing on a plan to shrink the balance sheet” and the question of when to implement it “is not answered yet.”
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.
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