Federal Reserve Chair Jerome H. Powell told lawmakers Wednesday that as Russia’s war escalates in Ukraine, “the implications for the U.S. economy are highly uncertain,” adding to the Fed’s challenge of tackling inflation and shepherding the broader recovery.
For months, Fed officials have been signaling an interest-rate increase at the March meeting, but Powell’s comments Wednesday were his first public indication of how much he thinks they should be raised.
Powell cautioned that it was too soon to tell exactly how the war would shape policymakers’ mid-March meeting. But he said he favored a moderate increase to kick off a number of hikes in 2022, given a tight labor market and a pledge to move more aggressively if inflation worsens.
Powell and his colleagues have held off on specifying an exact number of increases in the benchmark rate in 2022. But markets and analysts increasingly expect what could be five or six hikes this year, up markedly from the three the Fed policymakers penciled in when they released economic projections in December.
“It is appropriate for us to move ahead,” Powell said Wednesday. “Inflation is high, too high. The committee is committed to using our tools to bring it back down.”
Inflation has already soared to 40-year highs, and Russia’s invasion of Ukraine has heightened uncertainty about energy prices for American consumers and repercussions for the global financial system. As oil prices climbed to well over $100 a barrel, the United States and other world powers on Tuesday agreed to release 60 million barrels of oil from their reserves in a bid to bring costs down. Powell also pointed to concerns about possible shortages of wheat and corn as well as neon gas and the metal palladium.
“We can’t know how large or persistent those effects will be,” Powell said of the crisis in Ukraine. “That simply depends on events to come.”
Atlanta Fed President Raphael Bostic said Tuesday that the war in Ukraine further complicated the economic picture, especially regarding energy costs and global supply chains.
“All of the turmoil we have today is just going to exacerbate that uncertainty,” Bostic said. “Our hard job just got a whole lot harder.”
Regardless of what happens in Ukraine over the coming weeks and months, it is clear that the Fed faces an enormous inflation challenge. Much of its credibility rests in bringing inflation down significantly without harming the economic recovery or even tipping the country into a recession.
Powell said he still expected inflation to peak later this year as the Fed pulls back its support for the economy, supply chains improve and the vast fiscal spending from 2021 fizzles out.
But Powell acknowledged the Fed’s flawed track record on predicting where inflation is headed. For much of the pandemic, the Fed insisted inflation would be a temporary feature of a recovering economy, only to have that message increasingly disproved as Americans felt the strain of costlier meat or rent or paper towels.
“We’ve had this expectation, as you all know, for more than a year, and it hasn’t actually come true, so we’re humble about the fact that we can’t call with any confidence the turn,” Powell said.
As the Fed faces its challenges, Americans are gloomy about the economy. Inflation is one of the most tangible ways people view and experience it, and it is weighing on President Biden’s approval rating. The White House often touts strong job growth in 2021 and wage gains for lower-income workers as hallmarks of the pandemic recovery. But inflation has upended that rosy picture.
“With all the bright spots in our economy, record job growth, higher wages, too many families are struggling to keep up with the bills,” Biden said Tuesday during his State of the Union address. “Inflation is robbing them of the gains they might otherwise feel.”
While Powell’s testimony will offer a fresh lens into his thinking, he’ll probably have a clearer snapshot of the economy after his appearances on the Hill this week. On Friday, the Labor Department releases jobs data for February, with the expectation that the figures will build on the stronger-than-expected addition of 467,000 jobs in January. And next week, the Bureau of Labor Statistics will release February inflation data, which is expected to climb higher than the 7.5 percent notched in January.
Meanwhile, a delay over the Fed’s own leadership complicates the path ahead. Biden has made five nominations to the central bank, including the reappointment of Powell. But the nominees have yet to be confirmed, since Republicans on the Senate Banking Committee, which vets Fed nominees, raised concerns over Sarah Bloom Raskin, Biden’s pick to be the Fed’s top banking regulator. It is unclear when lawmakers will gather for a second attempt at a vote.
On Thursday morning, Powell will testify before the Senate Banking Committee.