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With inflation and Ukraine, Powell must thread a needle on Capitol Hill this week to calm markets

by Euro Times
March 1, 2022
in Business
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U.S. Federal Reserve Board Chairman Jerome Powell attends his re-nominations listening to of the Senate Banking, Housing and City Affairs Committee on Capitol Hill, in Washington, U.S., January 11, 2022.

Graeme Jennings | Reuters

Federal Reserve Chairman Jerome Powell is tasked with telling Congress this week that the central financial institution will likely be doing extra to manage inflation at a time when markets count on it is going to be doing much less.

With fears over the Russian invasion of Ukraine inflicting turmoil within the monetary world, Wall Road has quietly dialed down its expectations for Fed motion.

The place markets had been anticipating the Fed to boost rates of interest as much as seven occasions in 2022, current pricing now signifies simply 5 strikes. That might be the equal of bringing the Fed’s benchmark short-term borrowing fee up about 125 foundation factors, or to a variety between 1.25%-1.5%.

The shifting winds imply Powell has a tightrope to stroll as he explains throughout two days of congressional testimony that his establishment is dedicated to taming inflation whereas additionally being conscious of the geopolitical turmoil.

“He has to string a reasonably skinny needle. The balancing act goes to be tough,” mentioned Mark Zandi, chief economist at Moody’s Analytics. “My sense is he leads with the uncertainty that this all creates on condition that the Russian invasion might take many alternative paths, each darker than the opposite. He’ll reinforce the purpose that in a interval of such heightened uncertainty, it would make sense for the Fed to be slightly extra cautious in enacting coverage.”

Up till every week or so in the past, markets had been anticipating the policymaking Federal Open Market Committee to approve 25 foundation level hikes at every of its remaining seven conferences this yr. There even was a powerful lean to the primary transfer, on the March 15-16 assembly, being 50 foundation factors.

Russia’s assault has taken that off the desk, a minimum of for now.

“Play it by ear could be his finest message,” mentioned Peter Boockvar, chief funding officer at Bleakley Advisory Group. “That might permit him to kind of skate across the very tough place that he is at present in. We’ll take care of inflation, however — and that ‘however’ is let’s have a look at how the financial system goes from right here.”

Economists largely count on development to be stable this yr if a bit lower than in 2021, which was the strongest since 1984. Fed officers in December projected GDP to speed up at a 4% tempo in 2022.

Nevertheless, unrelenting inflation, at its quickest degree in 40 years, together with the prospects that the Russia-Ukraine state of affairs might add to inflation and additional complicate provide chains places one other wrinkle within the Fed coverage outlook.

“We’re coming into a interval of stagflation,” Boockvar mentioned, referring to greater inflation and low development. “The query is, does [Powell] focus extra on the ‘stag’ or does he focus extra on the ‘flation’? Simply based mostly on the historical past of the post-Volcker method of working financial coverage, the Fed focuses on development.”

Different economists, although, disagree.

In a observe to purchasers Sunday, Goldman Sachs mentioned “very excessive inflation” this yr “ought to make a straightforward case” for seven fee hikes this yr. Financial institution of America additionally has not relented from its forecast of seven strikes, and Citigroup economist Andrew Hollenhorst wrote Tuesday that “the market has been a bit too fast to price-out the potential for a 50 [basis point” hike at this month’s FOMC meeting.

Nonetheless, as of Tuesday noontime, the market had completely taken a half-percentage-point hike off the table and in fact assigned a tiny possibility to no move at all, according to the CME Group. Futures pricing can be volatile, so the probabilities could swing back if inflation slows or the Ukraine situation is resolved.

Powell, delivering his mandated semiannual update to a House panel Wednesday and then to a Senate committee Thursday, will have to address a wide range of views on where it should be at a critical time for monetary policy.

“We think Powell will emphasize that amid heightened geopolitical uncertainty the Fed remains focused on its macro objectives and will continue to move ahead with policy normalization with a view to bringing inflation back towards target while sustaining employment,” Krishna Guha, head of central bank policy strategy for Evercore ISI.

“We think he will acknowledge that the Russia Ukraine crisis and its stagflationary impulse from higher energy prices (inflation higher, growth lower) creates additional challenges for policy,” Guha added.



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