The time of ultra-low interest rates has come to an end. That’s what Federal Reserve Chairman Jerome Powell will tell lawmakers in his semiannual testimony on Wednesday and Thursday.
“Our monetary policy has been adapting to the evolving economic environment,” Powell will say, according to prepared remarks. “We have phased out our net asset purchases. With inflation well above 2% and a strong labor market, we expect it will be appropriate to raise the target range for the federal funds rate at our meeting later this month.”
This is in line with the Fed’s previous guidance. At the January policy meeting, Powell first hinted at a potential interest rate increase in the spring.
Market expectations for a quarter-percentage-point hike are above 90%, according to the CME FedWatch tool.
Despite the Omicron variant slamming America over the turn of the year, job growth has remained intact, while inflation continued to climb higher. In the year ended January, the personal consumption expenditure price index, which is the Fed’s preferred measure of inflation, rose at its fastest pace since 1982.
Powell – along with many economists – continues to expect that inflation will come down in 2022.
“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. We know that the best thing we can do to support a strong labor market is to promote a long expansion, and that is only possible in an environment of price stability,” according to Powell’s remarks.
The central bank is tasked with keeping prices stable and employment as high as possible. Only half of that to-do list is within reach right now.
Meanwhile, Russia’s invasion of Ukraine is likely to leave a mark on inflation as well by way of rising energy prices. Oil futures have soared above $100 a barrel on the back of the conflict.
“The near-term effects on the US economy of the invasion of Ukraine, the ongoing war, the sanctions, and of events to come, remain highly uncertain,” Powell will tell lawmakers. “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.”