Fed Chair Powell notes ‘highly uncertain’ Ukraine impact, but says rate hikes are still coming

Federal Reserve Board Chairman Jerome Powell speaking at a re-nomination hearing of the Senate Banking, Housing and Urban Affairs Committee, on January 11, 2022, in Washington, DC.

The Russia-Ukraine war has injected uncertainty into the Federal Reserve Chairman's view of interest rate hikes.

The central bank chief acknowledged the hardship caused by the Russian invasion of Ukraine in remarks prepared for appearances this week in Congress.

Powell said that the implications for the U.S. economy are highly uncertain.

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. We will need to respond quickly to incoming data.

The remarks come amid 40-year highs for inflation in the U.S., complicated by a Ukraine war that has driven oil prices to around their highest levels in a decade. The Fed's preferred inflation gauge showed its strongest 12-month gain since 1983 as consumer prices increased in January.

Powell and his fellow policymakers have been saying for weeks that they plan to raise benchmark interest rates. The process will involve interest rate increases, along with indications that the Fed eventually will start reducing its bond holdings, he said Wednesday.

He said that they would use their policy tools to prevent higher inflation from becoming entrenched while promoting a sustainable expansion and a strong labor market. We expect to raise the target range for the federal funds rate at our meeting later this month because of inflation and a strong labor market.

The Fed will begin to reduce its asset holdings after the rate hikes begin, he said.

Since the beginning of the Covid epidemic, the Fed has been buying Treasurys and mortgage-backed securities at a rapid pace, driving the total holdings on the central bank balance sheet to nearly $9 trillion.

Powell said the reduction will be conducted in a predictable manner, largely through allowing some proceeds from the bonds to roll off each month.

The chairman expects inflation to slow through the year as supply chain issues are resolved. He said the labor market was extremely tight and noted strong wage gains.

He said that high inflation imposes significant hardship on those least able to meet the higher costs of essentials.

Markets have fully priced in a rate increase at the March 15-16 meeting but have decreased their expectations for the rest of the year. The benchmark federal funds rate is currently between zero and 1%, but traders are now pricing in five quarter-percentage-point increases.