Fed’s Powell Tees Up Rate Hike in March on High Inflation and ‘Extremely Tight’ Jobs Market

By Tom Ozimek
Tom Ozimek
Tom Ozimek
Reporter
Tom Ozimek has a broad background in journalism, deposit insurance, marketing and communications, and adult education. The best writing advice he's ever heard is from Roy Peter Clark: 'Hit your target' and 'leave the best for last.'
March 2, 2022 Updated: March 2, 2022

Federal Reserve Chair Jerome Powell told lawmakers on Wednesday that the central bank is on track to raise interest rates at its next policy meeting in two weeks, with the Fed chief citing high inflation, robust growth, and an “extremely tight” labor market, while noting that the war in Ukraine was injecting high uncertainty into the economic outlook.

Powell made the remarks in testimony before the House Financial Services Committee on the occasion of the release of the semiannual Monetary Policy Report to Congress, which noted that recent geopolitical tensions related to Russia’s invasion of Ukraine were a “source of uncertainty” in commodity and financial markets.

Asked about his expectations for the path of monetary policy for the March meeting of the Federal Open Market Committee (FOMC), the Fed’s rate-setting body, Powell affirmed plans for a rate hike while acknowledging an elevated level of uncertainty due to Russia’s Ukraine offensive.

“We’re never on autopilot, obviously, and at a time like this what we need to do is lay out our principles and then with whatever clarity we do have, we then proceed with implementing those policies carefully and nimbly,” Powell said.

Coming into the March meeting, market expectations were that the FOMC was set to raise rates in what was to be the first of a series of hikes and what Powell described as expected “great progress” in trimming the Fed’s balance sheet.

“The question now is, how the invasion of Ukraine, the ongoing war, and the response from nations around the world, including sanctions, may have changed that expectation,” he continued.

While Powell said it’s too soon to say definitively how the conflict and response to it would impact the FOMC’s decision when it meets on March 15–16, he confirmed that the plan to hike basically remains in tact.

“For now, I would say I think we will proceed carefully along the lines of that plan,” he said, adding the caveat that the economic impacts of the Ukraine conflict were “highly uncertain.”

Fed funds futures contracts, which reflect market expectations for the path of interest rates, now give a 5 percent probability for a 50 basis point rate increase in two weeks, and 95 percent probability of 25 basis point hike.

The crisis in Ukraine has already pushed up energy prices, with Powell saying he expects to see them reflected in inflation readings down the line and in a likely cooling effect on consumer spending, “perhaps from declining risk sentiment.”

“We can’t know how large or persistent those effects will be. That simply depends on events to come,” he added.

Powell also commented on the likelihood of a rate hike when commenting on inflation more generally, saying he saw clear signs for the need to dial back the Fed’s easy money policies.

“What we’re facing now is an elevated level of demand in the face of supply-side constraints and it’s the collision of those two things that’s creating inflation,” Powell said.

“So there is an important job for us—to move away from these very highly stimulative monetary policy settings to a more normal level of rates—and perhaps tighter—at a time when inflation is highly elevated and that is what the committee plans to do,” he said.

In prepared remarks for testimony, Powell described the labor market as “extremely tight,” January’s job gains as “robust,” and the labor supply as “subdued.”

“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,” he said.

Powell described the recent Omicron-driven economic slowdown as “brief” and the financial positions of American households and businesses as “healthy.”

Inflation, he said, was “well above” the Fed’s 2 percent target, describing it as having seeped more broadly into a wider range of goods and services and as imposing “significant hardship” on Americans, especially those on lower incomes.

In 2021, the U.S. economy expanded at a 5.5 percent pace and payroll employment grew by 6.7 million.

The Fed’s preferred inflation gauge, the so-called personal consumption expenditures price index, rose 5.8 percent over the 12 months ending in December, while the index that excludes food and energy items, so-called core inflation, was up 4.9 percent. Both inflation readings were the highest in roughly 40 years.

Tom Ozimek
Reporter
Tom Ozimek has a broad background in journalism, deposit insurance, marketing and communications, and adult education. The best writing advice he's ever heard is from Roy Peter Clark: 'Hit your target' and 'leave the best for last.'