‘Everything Is So Uncertain’: Fed Is Worried Ukraine War Could Push Inflation Higher, Slow Growth, Says Powell
The comments below are an edited and abridged synopsis of an article by Kitco
With US inflation running at 40-year highs, the Fed’s priority is to avoid entrenched and self-perpetuating inflation. But Russia’s invasion of Ukraine and the new sanctions could have unintended consequences, Fed Chair Jerome Powell said.
This is something the Fed is watching carefully, Powell told the Senate Banking Committee. “Everything is so uncertain. We don’t want to add to the uncertainty. At times like these, we move carefully,” he said.
Powell confirmed that he plans to support a traditional 25-basis-point hike at the upcoming FOMC meeting. Fed officials will also make a plan to reduce the central bank’s nearly $9-trillion balance sheet.
However, concerns ahead are the unintended consequences of sanctions against Russia and the war in Ukraine.
Russia’s invasion of Ukraine already saw commodities hit multi-year highs, with oil surging past $100 a barrel. This could have an effect on inflation expectations and growth, Powell noted.
“What we know so far is that commodity prices have moved up significantly, energy prices in particular. That is going to work its way through the US economy. We’re going to see upward pressure on inflation, at least for a while. We don’t know how long that will be sustained for,” Powell said. “In addition, we could see risk sentiment declining. We could see lower investment, people holding back on spending. It is hard to see what the effect on both supply and demand will be. I would just echo that we need to be alert and nimble as we make decisions in what is quite a difficult environment.”
Powell warned that what matters most is how persistent those commodity price spikes are. He pointed out that any long-term oil shocks could filter into inflation and affect economic growth.
“Oil prices are up substantially from where they were two months ago, and that will get into gasoline prices and other fuel prices. And that will show up in higher inflation… Typically, with an oil spike, prices go up, and they either stay at that level or go down. In either of those cases, they add to the price level, but not to inflation,” Powell said. “The concern, though, is there’s already a lot of upward inflation pressure. And additional inflation pressure does probably raise at the margin the risk that inflation expectations will start to react in a way that is negative for controlling inflation.”