Powell signals Fed will hike rates this month despite uncertainty over Ukraine

“The bottom line is we will proceed, but we will proceed carefully as we learn more about the implications of the Ukraine war for the economy,” Powell told lawmakers about the Fed’s monetary policy plans. “We will avoid adding uncertainty to what is already an extraordinarily challenging, uncertain environment.”

Consumer prices rose 7.5% in the 12 months ending in January, the fastest pace of inflation in four decades. Prices rose for a wide range of items, including housing, cars, and groceries.

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After the hotter-than-expected January inflation numbers, some Fed watchers began betting that the central bank would decide to do a half-percentage-point rate hike at the monetary policy committee’s March meeting rather than the typical quarter-percentage-point raise, which would essentially be the implementation of two rate hikes at once. It would be the first time the Fed has taken such an extreme move in more than two decades.

Powell threw some cold water on that notion Wednesday and said he was rather “inclined to propose and support a 25-basis-point rate hike.”

Just a week ago, prior to the Russian invasion, markets were pricing in about a 33% chance that there would be a half-point hike. After Powell’s testimony, there appears to be a 0% chance of such an extreme move being made right out of the gate.

But Powell did not close the door on more aggressive rate hikes down the road this year should inflation remain steadily and stubbornly elevated.

“To the extent inflation comes in higher or is more persistently high than that, then we would be prepared to move more aggressively,” he said of the prospect of raising rates by a half-point during one or more other Federal Open Market Committee meetings later this year.

Russia invaded Ukraine less than a week ago and continues an assault against major Ukrainian cities, including the capital of Kyiv, despite enormous and crippling sanctions levied against it by the United States and other Western powers. There are fears that a protracted or expanded war in Europe could roil global markets and put the Fed in a more precarious position regarding upward revisions to the federal funds rate.

“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,” Powell told the committee. “Making appropriate monetary policy in this environment requires a recognition that the economy evolves in unexpected ways. We will need to be nimble in responding to incoming data and the evolving outlook.”

The Russian economy has languished under the weight of the new sanction regime. The ruble, Russia’s currency, is now worth less than 1 cent as Russians make a run on the banks to withdraw cash.

Meanwhile, the economic situation in Russia has been so calamitous that trading at Moscow’s stock exchange has been halted since last week. It is unclear when regulators plan to reopen trading. The day after the invasion, the MOEX Russia Index crashed as much as 45%.

While Powell, a Republican, enjoys bipartisan support for his chairmanship and was renominated to the role by President Joe Biden last year, the Fed has faced some pushback from Republicans and even some Democratic economists for the way that it has handled inflation.

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Some think that the Fed should have acted sooner to unwind its unprecedented asset purchasing program and ultra-loose monetary policy months ago while Congress was increasing spending.

The highly anticipated FOMC meeting will happen this month in Washington, D.C., on March 15 and 16.