Powell expects a quarter-point Fed rate hike this month
March 2, 2022 | Christopher Rugaber | AP News
Chair Jerome Powell said Wednesday that he supports a traditional quarter-point increase in the Federal Reserve’s benchmark short-term interest rate when the Fed meets later this month, rather than a larger increase that some of its policymakers have proposed.
But Powell did open the door to a bigger hike in the event that inflation, which has reached a four-decade high, doesn’t noticeably decline this year, as the Fed expects it to.
“I’m inclined to propose and support” a quarter-point rate hike to fight the acceleration of inflation that has engulfed the economy in recent months, Powell told the House Financial Services Committee on the first of two days of semiannual testimony to Congress.
Most other Fed officials have in recent weeks supported a similar modest rise, while a few have said they back a half-point hike or are at least open to such an increase. Higher Fed rates typically lead, in turn, to higher borrowing costs for consumers and businesses, including for homes and auto loans and credit cards.
“We have an expectation that inflation will peak and begin to come down this year,” Powell said. But he added: “To the extent inflation comes in higher … then we would be prepared to move more aggressively” by raising rates by more than a quarter point later this year.
The stock market rose in response to Powell’s support of the smaller increase. The S&P 500 jumped 1.7% in mid-day trading.
The Fed chair cautioned that the economic consequences of Russia’s invasion of Ukraine, and the resulting sanctions by the U.S. and Europe, are “highly uncertain” and said “it’s too soon to say” how they might affect the Fed’s policies.
Before Russia’s invasion, the Fed planned to carry out “a series” of rate increases this year, Powell said, potentially at each of the remaining seven Fed meetings. For now, the Fed will “proceed carefully along the lines of that plan.”
Economists have forecast that the Fed will implement five to seven quarter-point hikes this year.
Powell spoke a day after President Joe Biden said in his State of the Union address that “my top priority is getting prices under control.”
This month’s increase 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 reduce inflation, now 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 solid, the economy can withstand modestly higher borrowing costs.
