Federal Reserve Chairman Jerome Powell said that Russia’s continued invasion of Ukraine will drive oil prices up and that the central bank stands prepared to deal with the fallout.
Powell, a Republican who was recently renominated by President Joe Biden to lead the Fed, said in testimony before Congress on Wednesday and Thursday that energy prices are likely to rise, at least briefly, hurting households and business — but that the central bank will ensure that the spikes will not translate into even higher inflation. The testimony comes two weeks before the central bank is set to hike interest rates for the first time in years and, while inflation was at top of mind for lawmakers, Russia’s war was the main topic of discussion.
While the conflict is happening thousands of miles away, it is having effects on the domestic economy.
Futures for Brent crude oil have climbed to nearly $114 per barrel, a sharp increase from the $95 level oil was at prior to the Russian invasion. That increase in energy prices worried some lawmakers who feared it would be translated into higher gasoline costs and contribute to rising inflation.
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Powell said that because of the conflict and the higher energy costs, gas prices are expected to rise, dampening commerce.
He explained that the key question for those worried about the bump in prices, which will affect headline inflation, is the sticking power of those higher prices and how long they will linger — a major unknown, given the uncertainty surrounding the war and surrounding Russian leader Vladimir Putin’s appetite to escalate the conflict.
“In the near term, and we already see this, oil prices are up substantially from where they were two months, three months ago,” Powell said before the Senate Banking Committee on Thursday. “And that will get into gasoline prices and other fuel prices and that will show up in higher inflation. The question, really, is what will be the extent of those, and even more important, what will be their persistence.”
The Fed is set to raise interest rates several times this year. While some analysts had anticipated that the central bank would opt for an aggressive half-percentage-point hike right out of the gate this month, Powell tamped down that speculation during the hearing. He suggested that the rate hike would rather be a traditional quarter-point increase, and the markets are now pricing that in as a near certainty.
But despite the Fed likely not being so aggressive right out of the gate, during his testimony, Powell said that the central bank is prepared to react and use its tools to stave off inflation across the board should energy prices drive up inflation more than anticipated.
“The effects are going to be passed through into gas prices, into lower economic activity, and into inflation, headline inflation,” Powell said of the higher energy prices. “Is that going to lead to repeated inflation increases at that time? And that that is not necessarily the case and, of course, we will use our tools to make sure that it’s not the case.”
Powell explained that if the war in Ukraine winds down quickly and energy prices settle back down to where they were before, there would not be a sticking effect on inflation. In a sense, he argued that higher energy prices’ effect on inflation would be transitory, a phrase that the Fed used to characterize inflation last year before it became clear that the higher prices were not going to settle down on their own without changes to monetary policy.
“You can have an oil spike, and if it just comes and goes, prices will go up, but it won’t actually affect ongoing inflation. That’s really the key thing,” Powell told lawmakers.
Russia invaded Ukraine less than a week ago, and it has continued 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 raising interest rates.
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“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 said Wednesday before the House Financial Services 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,” he added.
