- U.S. Federal Reserve Chairman Jerome Powell affirmed his support for a quarter-point rate rise at the next central bank policy-setting meeting in March, confirming what most market participants had been pricing in anyway and sending stocks surging.
- Any hopes that the Fed may have had that inflation would start to subside by the end of this year looks to be delayed or deferred indefinitely, as will a return to a more normal monetary policy.
Amidst the din of rockets hitting Ukrainian buildings, one voice that is perhaps more important for investors than Putin’s is that of U.S. Federal Reserve Chairman Jerome Powell who told lawmakers yesterday that the central bank is prepared to push forward with rate hikes.
Powell affirmed his support for a quarter-point rate rise at the next central bank policy-setting meeting in March, confirming what most market participants had been pricing in anyway and sending stocks surging.
In testimony before the U.S. House Financial Services Committee, Powell couched his language in typically ambiguous fashion, ensuring that he has more than enough wiggle room should the situation change dramatically,
“I’m inclined to propose and support a 25bp rate hike. The bottom line is that we will proceed, but we will proceed carefully as we learn more about the implications of the Ukraine war for the economy.”
“Inclined” is not set in stone and the Fed has of late adopted a monetary policy of “nimbleness” which is probably the most appropriate given the circumstances.
With the full extent of Western sanctions on Russia yet to arrive on American shores, some of the early fallout has already hurt wallets, with oil rising above US$110 for the first time in 8 years and the price of natural gas skyrocketing.
Any hopes that the Fed may have had that inflation would start to subside by the end of this year looks to be delayed or deferred indefinitely, as will a return to a more normal monetary policy.
Given the raft of defaults that excluding Russia from the global financial system is likely to set off, the Fed may need to be on hand to step in with liquidity to ensure that money markets continue to function smoothly.
Raise rates too aggressively and policymakers risk being the last straw that breaks the economy’s back, throwing it into recession, given that inflation is likely to weigh heavily on margins and dampen growth prospects.
Investors can expect another source of market volatility given Powell’s testimony,
“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.”
