Delivering his semi-annual Congressional testimony on Wednesday, Federal Reserve chair Jerome Powell said he’s inclined to support a 25 basis point rate hike in two weeks’ time.
“I do think it will be appropriate to raise our target range for the federal funds rate at the March meeting in a couple of weeks,” Mr Powell said.
“I am inclined to propose and support a 25 basis point rate hike.”
US inflation hit a 40-year high in the second half of last year, exceeding the FOMC’s longer-run objective.
While conceding that the near-term effects on the US economy of the invasion of Ukraine remain highly uncertain, Powell insisted that the repercussion would not be as severe.
“Our financial institutions and our economy do not have large interactions with the Russian economy. It’s a relatively small thing. And it’s gotten smaller and smaller in recent years,” Powell said.
He insisted the Fed would “proceed carefully”.
“There’s 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,” Powell told Congress.
“We’re going to avoid adding uncertainty to what is already an extraordinary challenging moment,” he continued.
Powell’s assertions surprised forecasters and economist, many of whom were certain the Federal Reserve would be forced to tweak its monetary tightening schedule.
“I think the Federal Reserve will be more gradual now in its monetary tightening … I expect four rate rises from the Fed this year now, rather than the five I was forecasting previously,” Schroders’ chief economist, Keith Wade, said late last week.
Earlier this week, Reserve Bank governor Philip Lowe referred to the war in Ukraine as “a major new source of uncertainty”.
Reiterating the bank’s resolve to be patient, the governor said the board will monitor how the various factors affecting inflation in Australia evolve.
The central forecast is for underlying inflation to increase further in coming quarters to around 3.25 per cent, before declining to around 2.75 per cent over 2023 as the supply-side problems are resolved and consumption patterns normalise.
