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Powell backs 25-basis-point March rate hike

Powell backs 25-basis-point March rate hike

Chairman of the Federal Reserve, Jerome Powell, said on Wednesday that he was “inclined to propose and support a 25-basis-point rate rise” at the central bank’s policy meeting later this month, but that he would be “prepared to move more forcefully” if inflation did not decelerate as anticipated.

Powell told the Financial Services Committee of the United States House of Representatives that the economic outlook had become “highly uncertain”. The Federal Reserve wanted to “proceed carefully” as it changed monetary policy in an already complicated situation. The conflict in Ukraine framed Powell’s remarks.

However, although Powell’s remarks regarding the Fed’s March 15-16 meeting put an end to the discussion about the central bank’s first step toward tightening policy, he cautioned that this does not rule out the possibility of the central bank moving even quicker in the future.

In his testimony, the Secretary of State indicated that “we will approach cautiously as we learn more about the repercussions of the Ukraine conflict on the economy.” “We anticipate that inflation will reach a climax and then begin to decline this calendar year. If inflation comes in higher or remains higher for a longer period, we would be prepared to act more aggressively by increasing the federal funds rate by more than 25 basis points at a meeting or meetings,” the Fed said.

It has been around zero since the Federal Reserve cut its benchmark overnight interest rate in 2020 to protect the economy from the effects of the coronavirus outbreak in West Africa.

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The House Financial Services Committee chairman, Jerome Powell, responded to a range of questions about the Ukraine conflict early in his appearance before the panel. He said the Federal Reserve had begun to analyze scenarios about the war’s potential impact, but that there was nothing in the data yet to warrant changing a Fed policy pivot that has been in place since late last year in response to higher-than-expected inflation.

The major US market indices began higher, with gains continuing while Powell spoke, and the rate on 10-year Treasury notes increased. The US dollar’s value increased compared to a basket of crucial trade partners’ currencies.

“He wished to leave the Federal Reserve’s options open… Current market rate expectations, which have plunged since Russia’s incursion, received no resistance, according to Capital Economics’ Paul Ashworth, the firm’s senior US economist.

Powell maintained the central bank’s basic narrative: rising inflation, which is now running at around three times the central bank’s 2-percent objective, and a “very tight” labor market are justifications for raising interest rates.

According to the Fed chairman, the effect of the coronavirus epidemic on the economy looked to be fading. He also said that hiring was still high, and inflation had surfaced as a significant worry.

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According to the Federal Reserve, inflation “is currently running considerably beyond our longer-run aim of 2 percent.” “Demand is high, and bottlenecks and supply restrictions are hampering the ability of manufacturers to react fast,” Powell said. His remarks were followed by a statement that supply interruptions had been “greater and longer-lasting than expected,” and he reiterated the Federal Reserve’s commitment to take whatever action is required to bring prices back into line.

However, although some of the present inflationary pressures are projected to subside later this year, “we remain vigilant to the dangers of possible additional upward pressure… When necessary, we will use our policy instruments to prevent higher inflation from becoming entrenched.”

In the same breath, Powell noted the increased complexity that has arisen as a result of developments in Europe, which have the potential to both exacerbate pricing pressures and undermine economic growth.

According to him, it is “very unknown” what the impact will be on the economy of the United States in the short term of the invasion of Ukraine, the continuing conflict, the sanctions, and future events. It is necessary to recognize that the economy changes in unanticipated ways to formulate appropriate monetary policy in this context. When new information comes in, and the outlook changes, we will need to be quick to adapt.”

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Impact of war

The Fed’s officials were surprised by the continuously high inflation since they had anticipated that the rapid price rises induced by the epidemic would be short-lived.

Their deliberations on what to do about it have been ongoing since last autumn.

As a result of its policy meeting on March 15-16, the Federal Reserve is projected to continue raising borrowing rates for the rest of the year.

While the Federal Reserve’s primary concern remains rising inflation, Russia’s invasion of Ukraine has introduced a new dimension to policymakers’ consideration, with the potential to shift monetary policy in opposing directions if the situation continues. For example, a persistent increase in energy costs and additional restrictions on the movement of people and products might push inflation even higher in the future.

However, global economic development may suffer when the United States and European governments were anticipating that the epidemic was subsiding to the point when the remaining restrictions on companies, schools, and socializing could be lifted from the books.

Suppose the war in Ukraine drags on or even escalates into a wider conflict. In that case, the Federal Reserve may be called upon to maintain the stability of global dollar markets, a task that could conflict with the central bank’s plans to reduce its asset holdings.

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