Powell tells Congress Fed will hike rates this month – Press Enterprise

BY CHRISTOPHER RUGABER

WASHINGTON (AP) – Chairman Jerome Powell said Wednesday that he supports a traditional quarter-point hike in the Federal Reserve’s short-term benchmark interest rate when the Fed meets later this month, rather than a larger hike that some of its policymakers are planning have suggested.

But Powell opened the door for a bigger hike if inflation, which has hit a four-decade high, doesn’t ease significantly this year, as the Fed expects.

“I’m inclined to propose a quarter-point rate hike” to combat the acceleration in inflation that has been engulfing the economy in recent months, Powell told the House Financial Services Committee on the first of two days of the semi-annual congressional hearing.

Most other Fed officials have supported a similar modest hike in recent weeks, while some have said they support or are at least open to a half-point hike. Higher Fed interest rates, in turn, typically translate into higher borrowing costs for consumers and businesses, including home equity and auto loans and credit cards.

“We expect inflation to peak this year and start falling,” Powell said. But he added: “As inflation gets higher…then we would be willing to move more aggressively” by raising rates by more than a quarter point later this year.

The stock market rose in response to Powell’s support of the lower rise. The S&P 500 was up 1.7% in midday trade.

The Fed Chair warned that the economic fallout from Russia’s invasion of Ukraine and the resulting US and European sanctions were “highly uncertain” and said “it is too early to say” how they will affect the policy of the Fed could affect the Fed.

Before the Russian invasion, the Fed was planning to deliver “a series” of rate hikes this year, Powell said, possibly at each of the remaining seven Fed meetings. For now, the Fed will “proceed carefully in line with this plan.”

Economists have forecast the Fed to hike five to seven quarter points this year. This month’s hike would be the first since 2018. And it would mark the beginning of a thorny challenge for the Fed: It wants to raise rates enough to bring down inflation, which is now at a four-decade high, but not so fast that it stifles growth and cessation. Powell is betting the economy can handle slightly higher borrowing costs with a low 4% unemployment rate and solid consumer spending.

The Fed’s interest rate is now fixed near zero, where it has been since the pandemic broke out in March 2020, and the Fed responded by cutting interest rates to support the economy.

Powell acknowledged that consumer price hikes have risen well above the Fed’s 2% target — inflation hit 7.5% yoy in January — and that the higher prices have lasted longer than expected. He also pledged to use the Fed’s tools to bring inflation back to its target.

“We understand that high inflation creates significant difficulties, particularly for those who are least able to afford the higher costs of basic necessities such as food, shelter and transportation,” the Fed Chair said.

Still, he added that the central bank expects inflation to ease gradually this year as tangled supply chains unravel and consumers slow down some spending.

Most economists agree that inflation is likely to fall from current levels but will remain elevated. Rising prices are spreading via items disrupted by the pandemic – cars, electronics, furniture and other household goods – to broader spending categories, particularly rental expenses.

Goldman Sachs has raised its inflation forecast and now projects prices will still rise at a relatively high annual rate of 3.7% through the end of the year, according to the Fed’s preferred measure. That’s well above the Fed’s most recent forecast, released in December, of 2.7%. When central bank policymakers meet in two weeks, they will update this forecast.

Powell said the Fed will also begin to trim its massive $9 trillion balance sheet, which more than doubled during the pandemic as the Fed bought trillions of dollars in bonds to try to keep longer-term interest rates low. He said central bank policymakers were likely to agree on a plan to reduce their bond holdings when they meet in two weeks, but declined to say when the plan might go ahead. The Fed’s balance sheet shrinking means that longer-term borrowing costs continue to rise.

In public statements, central bank officials have debated whether to raise interest rates by half a percentage point this month – an aggressive move – although most have supported a traditional quarter-point hike. Russia’s invasion of Ukraine has made a half-point hike even more unlikely.

The invasion of Ukraine has boosted oil prices by about 18% to around $110 a barrel, which will make gas more expensive. Some economists have forecast that average gas prices could soon reach $4 a gallon, down from a national average of $3.66 on Wednesday.

Higher energy prices will push inflation even higher than it otherwise would have been in the coming months, strengthening the case for Fed rate hikes. But more expensive gasoline also robs consumers of money to spend on other things. This, in turn, is likely to slow consumer spending and potentially weaken the economy — a scenario that would normally keep the Fed from raising rates.

Aside from its impact on inflation, the war is likely to have only a limited impact on the US economy, analysts say, unless it escalates significantly. Only about 0.5% of US trade is with Russia.

Powell warned that the war could lead to shortages of raw materials such as neon gas and palladium, which are used to make semiconductors. A shortage of computer chips has slowed production of cars and electronics over the past year and contributed to high inflation.

But the Fed chair also hinted that the war’s overall impact on the US economy may be limited unless the conflict escalates significantly.

“Our financial institutions and our economy do not have major interactions with the Russian economy,” he said. “And it’s gotten smaller and smaller in recent years.”