Chairman Jerome Powell said the Fed will “need to be nimble” in responding to changes resulting from the Russian invasion of Ukraine and sanctions being imposed by the U.S. and Europe.
“With inflation well above 2% and a strong labor market, we expect it will be appropriate to raise the 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.
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. 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.
Costlier energy will send inflation even higher than it otherwise would have been in the coming months, bolstering the case for Fed rate hikes. But more expensive gas also deprives consumers of money to spend on other things. This, in turn, will likely hold down consumer spending and potentially weaken the economy — a scenario that would usually discourage the Fed from raising rates.the Fed may not tighten credit conditions as much as had been expected.
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