Federal Reserve Chair Jerome Powell made clear Wednesday that the Fed will begin raising interest rates this month in a high-stakes effort to restrain surging inflation.
In prepared testimony he delivered to a congressional committee, Powell cautioned that the economic consequences of Russia's invasion of Ukraine are “highly uncertain.” He said the Fed will “need to be nimble” in responding to unexpected changes resulting from the war or the far-reaching sanctions that the United States and Europe have imposed in response.
The Fed is widely expected to raise its benchmark short-term interest rate several times this year beginning with its March 15-16 meeting. In his testimony, Powell provided little additional guidance about how fast the Fed would do so.
A rate hike next month would be the first since 2018. And it would mark the beginning of a delicate challenge for the Fed: It wants to increase rates enough to bring down inflation, which is at a four-decade high, but not so fast as to choke off growth and hiring. Powell is betting that with the unemployment rate low, at 4%, and consumer spending healthy, the economy can withstand modestly higher borrowing costs.
“With inflation well above 2% and a strong labor market, we expect it will be appropriate to raise the (benchmark short-term rate) at our meeting later this month,” Powell said. That rate is now pegged near zero, where it has been since the pandemic struck in March 2020 and the Fed responded by slashing interest rates to help support the economy.
When the Fed raises its short-term rate, borrowing costs also typically rise for a range of consumer and business loans, including for homes, autos and credit cards.
“We understand that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food, housing, and transportation,” the Fed chair told the House Financial Services Committee on the first of two days of semiannual testimony to Congress.
Still, he added that the central bank expects inflation to gradually decline this year as tangled supply chains unravel and consumers pull back a bit on spending.
Most economists agree that inflation will likely decline from its current high level. Yet they increasingly expect it to stay elevated. Rising prices are spreading beyond items that were disrupted by the pandemic — autos, electronics, furniture and other household goods — into broader categories of spending, especially rental costs.
In his testimony Wednesday, Powell said the Fed will also begin reducing its huge $9 trillion balance sheet, which more than doubled during the pandemic when the Fed bought trillions of dollars of bonds to try to hold down longer-term rates. The Fed chair said only that the reduction would begin after rate hikes were initiated. Shrinking the Fed's balance sheet has the effect of further raising longer-term borrowing costs.
Additional reporting by The Associated Press.