Powell: Fed needs to move away from stimulative monetary policy

US Federal Reserve Chair Jerome Powell, testifying before Congress on the first day of his semi-annual speech, said that it is time to move away from highly stimulative monetary policy settings.
Monetary policy cannot address supply-side challenges and constraints, Powell added, stressing that “The US economy is very strong, the labor market is extremely tight and inflation is well above target.”

“We will be flexible in raising interest rates in months ahead”, Powell also stated that “before the Russian invasion, the Fed was set to raise interest rates in March and with every meeting for the rest of the year live.”

Key Quotes
“We will proceed carefully in light of Ukraine war.”

“The economic impact of the war is highly uncertain.”

“There could be effects on spending and there are already effects on commodities.”

“We can’t know how large and persistent those effects will be.”

“We can’t know how large war-related effects will last.”

“I do think its still appropriate to raise interest rates by 25bps in March.”

It is becoming more and more obvious that a lot has changed since July 2021, when Federal Reserve Chairman Jerome Powell said inflation was “temporarily” boosted by post-pandemic measurement effects and supply bottlenecks.

On Wednesday, he told a House panel that he is leaning toward a quarter-point increase in March to combat inflation that has been stronger and longer than expected.Inflation has surged to its quickest pace since the early 1980s. So Powell spent plenty of time explaining the Fed’s framework as he spoke to the House Financial Services Committee on Wednesday morning for his semi-annual testimony.

He may get additional questions about how the central bank plans to fight the increase in consumer prices without causing a recession—a steep challenge.

Members of Congress could also ask how Russia’s invasion of Ukraine will affect Fed policy, and about the surge in global demand for the dollar that followed the aggressive sanctions imposed in response by Europe and the US.

In prepared testimony this morning, Powell said the Fed plans to “our policy tools as appropriate to prevent higher inflation from becoming entrenched while promoting a sustainable expansion and a strong labor market”. He further said the Ukraine crisis and impact remain uncertain and the Fed expects to be nimble in responding to “incoming data and the evolving outlook”.