What the Fed’s Powell thinks about inflation and Ukraine

Federal Reserve Chair Jerome Powell on Wednesday offered unusual clarity for lawmakers about the prospects of higher interest rates this month, while warning that Russia’s invasion of Ukraine presents a huge unknown for the economy.

Powell, in particularly stark terms for the head of the U.S. central bank, said the Fed is likely to raise its benchmark federal funds rate a quarter percentage point when it meets March 15-16. But he said it’s too soon to tell how geopolitical risks — including the potential for higher prices, financial market instability or cyber warfare — may complicate the path forward for policymakers beyond that.

Here are some key quotes from the Fed chief, who appeared before the House Financial Services Committee to testify on the economy, along with notes on what he meant in plain English:

“We develop working plans for making adjustments to monetary policy over the coming months, and then we are flexible as plans meet the real world. … At a time like this, what we aim to do is lay out our principles, with whatever clarity we do have, and then proceed to implement those policies carefully and nimbly.”

Here Powell is saying that the Fed can’t reliably tell people what the central bank will do for the rest of the year because the outlook is too uncertain. All it can tell them is how it might react to different scenarios.

But Powell made clear that the Fed is going to raise interest rates later this month, and that it’s also likely to steadily hike rates at subsequent meetings, with the size and speed depending on whether inflation stays high, gets even hotter, or begins to cool.

One big question: whether there will be significant ripple effects from Russia’s invasion of Ukraine, especially on oil and food prices. “It’s too soon to say for sure,” he said.

“The price of oil depends on events that haven’t occurred yet. It really depends on where this goes going forward. We have seen prices move up, including just in the last couple of days … The effects are going to be passed through into gas prices, into lower economic activity and into inflation. … The question will then become … is that going to lead to repeated inflation increases at that time? And that is not necessarily the case.”

The biggest foreseeable risk for the U.S. economy from Russia’s attack on its neighbor is soaring oil prices, which could feed both into higher costs at the gas pump for Americans as well as higher transportation costs that could stoke price increases elsewhere. That might only be a temporary shock to the economy that will fade as more U.S. production comes online. But since U.S. inflation is already at a four-decade high, the issue is whether oil prices could mix dangerously with other rising prices.

Powell is suggesting that higher oil prices might not end up changing the long-term inflation outlook, or the Fed’s policy plans, but they’ll be watching to see if it does.

“The United States, our financial institutions and our economy do not have large interactions with the Russian economy. It’s a relatively small thing, and it’s gotten smaller and smaller in recent years, so there wouldn’t be direct effects from these kind of things on the U.S. economy. It’s hard to think what the second-order effects might be.”

In a nutshell: There might be blowback on the U.S. from the conflict, but our economic ties with Russia — trade and investment — aren’t enough to cause problems domestically on their own. Instead, the U.S. might see more of an indirect effect through higher prices since Russia is a significant exporter of commodities like wheat and metals like steel. There might be other potential implications as well, depending on how the situation develops, but those are hard to predict, he’s saying.

“Everything that we can do to protect ourselves against cyber, we’re doing it. We’re doing it — the private, large financial institutions are doing it. … We’re certainly on high alert and will continue to be.”

Powell has frequently cited cyberattacks as a risk that keeps him up at night, but the dangers are much more elevated now that the U.S. and its European allies have imposed tough economic sanctions on Russia in response to Ukraine. He said there haven’t been troubling incidents yet, but it’s clear that this is top of mind for the central bank.

“I do think it will be appropriate to raise our target range for the federal funds rate at the March meeting in a couple of weeks, and I’m inclined to propose and support a 25-basis-point rate hike.”

This is a strikingly direct statement for a Fed chair. He’s telegraphing to investors and the public exactly what to expect from the central bank’s meetings this month, though it will be subject to the vote of the full policymaking committee: a standard rate increase of a quarter of a percentage point.

There’s been some speculation in markets as to whether the Fed might pursue a more aggressive rate hike, or even hold off in the face of uncertainty around Ukraine. But Powell is essentially getting rid of that guesswork. He also gave a hint about why he was being so direct: “We’re going to avoid adding uncertainty to what is already an extraordinarily challenging and uncertain moment.”

“Those of us on the committee have an expectation that inflation will peak and begin to come down this year. And to the extent that inflation comes in higher or is more persistently high than that, 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.”

Here Powell is laying out the flowchart of how the Fed might respond to incoming data. Right now, the central bank expects inflation to taper off throughout the year, as supply chain bottlenecks ease, congressional spending fades and the Fed removes its own support for the economy by raising rates. But if price spikes don’t start to slow, or if they get even faster, the central bank could hike rates more aggressively than a standard quarter-point increase.

“It’s more likely than not that we can achieve what we call a soft landing.”

As the Fed begins raising interest rates, the fear is that it could end up causing enough damage in the job market or in financial markets that it leads to a recession. The central bank has done just that many times in history. But Powell says he’s confident that the Fed can instead cause a so-called soft landing — that is, a gentler slowing of the economy that brings down inflation but doesn’t lead to negative growth.

For now, the Fed is actually boosting growth with its main policy rate set near zero, and the central bank chief suggested that it won’t really be crimping economic growth until that rate reaches at least 2 percent. But he did leave open the possibility that the Fed might need to raise borrowing costs beyond that point, which could mean some collateral damage for workers.

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