The Federal Reserve is poised to lift interest rates from near zero at its meeting later this month as it attempts to cool down high inflation, even as conflict in Ukraine ramps up uncertainty, according to the Federal Reserve chair.
The target range for the federal funds rate is expected to be raised at the meeting later this month, according to testimony prepared for delivery to the House Committee on Financial Services. He noted that the Fed will shrink its big bond holdings after raising rates, a move that will take steam out of the economy.
While the Fed is prepared to use their policies to make money more expensive in a bid to slow consumer and business demand, Mr. Powell added that the central bank must be prepared to respond as Russia invades.
The near-term effects on the U.S. economy of the invasion of Ukraine, the ongoing war, the sanctions and of events to come remain highly uncertain.
Mr. Powell said that the upheaval was creating a sense of wariness, not predicting what it would mean for policy. According to economists, the conflict is likely to push gas prices higher, further elevating inflation, but that a combination of higher fuel costs and wavering consumer sentiment could drag on economic growth.
Mr. Powell said they would be watching the situation closely.
The Fed chair is technically serving on a pro tempore basis as he awaits Senate confirmation to a second term, a vote that has been delayed as Republicans boycott one of President Biden's other nominees to the Fed. He is testifying before the House on Wednesday and the Senate on Thursday at a tense political and economic moment, as a war rages overseas and inflation dominates headlines and scares consumers at home.
Mr. Powell said that growth has been strong and jobs are plentiful.
The labor market is very tight. Employers are having difficulties filling job openings, an unprecedented number of workers are quitting to take new jobs, and wages are rising at their fastest pace in many years.
High inflation has obscured some of the progress. In his State of the Union address on Tuesday night, Mr. Biden said fighting high prices was his top priority and that it had become a national discussion.
In the year ended in January, the Consumer Price Index increased by 7.5 percent, the fastest pace in 40 years, and the Personal Consumption Expenditures index increased by 6.1 percent. The central bank wants inflation to average 2 percent over time.
What is inflation? Your dollar will not go as far tomorrow as it did today because of inflation. The change in prices for everyday goods and services is known as the annual change in prices.
What causes inflation? It could be due to increased consumer demand. Some developments, such as limited oil production and supply chain problems, can cause inflation to rise and fall.
Is inflation bad? It depends on the situation. Moderate price gains can lead to higher wages and job growth.
Can inflation affect the stock market? inflation can cause trouble for stocks. During inflation booms, financial assets have been bad, while tangible assets have held their value better.
Mr. Powell said that demand is strong and that supply constraints are limiting how quickly production can respond.
The Fed expects inflation to cool off this year, but it is keeping a close eye on factors that could keep it high.
Mr. Powell said that policy tools would be used to prevent higher inflation from becoming entrenched while promoting a sustainable expansion and a strong labor market.
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