Federal Reserve Chairman Jerome Powell backed a quarter-point interest-rate increase this month to commence a series of rises and did not rule out a larger move at some stage, despite uncertainty caused by Russia’s invasion of Ukraine.
“I am inclined to propose and support a 25 basis-point rate hike,” Mr Powell told the House Financial Services Committee on Wednesday.
“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.”
Fed officials are pivoting to tackle the fastest inflation in 40 years and a few have publicly discussed the potential need to increase by a half point some time this year if inflation comes in too hot. They get February data on consumer prices on March 10, five days before they commence their next policy meeting.
While acknowledging the uncertainty posed by the attack on Ukraine, Mr Powell said the need to remove pandemic policy support had not changed.
“The bottom line is that we will proceed but we will proceed carefully as we learn more about the implications of the Ukraine war for the economy,” he said.
Investors increased their bets on the pace of rate increases this year as the Fed chief spoke, pricing in around 140 basis points of tightening starting this month.
Mr Powell said the labour market is “extremely tight”, essentially a message to Congress that the central bank has met its maximum employment goal in current conditions, which opens the door to its inflation fight. He said employers are having difficulties filling job openings, while workers are quitting and taking new jobs, helping wages rise at the fastest pace in years.
“We know that the best thing we can do to support a strong labour market is to promote a long expansion, and that is only possible in an environment of price stability,” Mr Powell said.
Financial markets have reeled since Russia’s invasion of Ukraine, sending energy prices jumping and potentially pushing inflation higher, even as heightened tension clouds the outlook for global growth.
Mr Powell said that 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”.
The Fed chairman said he continues to expect inflation to decline over the course of the year as supply constraints ease and demand cools off following waning fiscal support and higher interest rates.
Mr Powell, whose confirmation for a second term has been stalled by Republican opposition to President Joe Biden’s selection of Sarah Bloom Raskin to be vice chair for supervision, faces the challenge of pivoting policy to confront inflation while not tightening so much that the economy stalls.
Critics, including some Republican politicians, say the US central bank has been too slow to act.
The Fed’s preferred gauge of price movements rose at a 6.1 per cent annual pace in January, triple the central bank’s 2 per cent target.
Fed officials will release fresh quarterly estimates for interest rates and the economy at their coming meeting, offering some guidance for how far and fast they expect to tighten policy in the coming months.
The Fed chairman will follow his remarks on Wednesday with an appearance before the Senate Banking Committee on Thursday, where Mr Powell is waiting for a confirmation vote together with Mr Biden’s four other nominees for the central bank.