Powell Says Rates Are Headed Higher, Even as Ukraine Poses Uncertainty

Jerome H. Powell, the Federal Reserve chair, will tell lawmakers on Wednesday that the central bank is poised to lift interest rates from near zero at its meeting later this month as it embarks on an effort to cool down high inflation — even as conflict in Ukraine ramps up uncertainty.

“We expect it will be appropriate to raise the target range for the federal funds rate at our meeting later this month,” Mr. Powell said in testimony prepared for delivery to the House Committee on Financial Services. He noted that the Fed will move toward a “predictable” shrinking of its big bond holdings after raising rates, a move that will take additional steam out of the economy.

While Fed officials are prepared to use their policies to make money steadily more expensive in a bid to slow consumer and business demand, hoping to cool off today’s rapid prices, Mr. Powell added that the central bank must be poised to respond as Russia’s invasion of Ukraine looms large.

“The near-term effects on the U.S. economy of the invasion of Ukraine, the ongoing war, the sanctions and of events to come, remain highly uncertain,” he said. “We will need to be nimble in responding to incoming data and the evolving outlook.”

Mr. Powell painted the geopolitical upheaval as something creating a sense of wariness, rather than predicting what it could mean for policy. Economists have said that the conflict is likely to push gas prices higher, further elevating inflation, but that a combination of higher fuel costs and wavering consumer sentiment could drag on economic growth.

“We will be monitoring the situation closely,” Mr. Powell said.

The Fed chair is technically serving on a pro tempore basis as he awaits Senate confirmation to a second term — a vote that has been delayed as Republicans boycott one of President Biden’s other nominees to the Fed. He is testifying before the House on Wednesday and the Senate on Thursday at a tense political and economic moment, as a war rages overseas and inflation dominates headlines and spooks consumers at home.

Mr. Powell also addressed a positive aspect of today’s economy: Growth has been strong and jobs are abnormally plentiful.

“The labor market is extremely tight,” Mr. Powell said. He added that “employers are having difficulties filling job openings, an unprecedented number of workers are quitting to take new jobs and wages are rising at their fastest pace in many years.”

Some of that progress has been obscured by high inflation. Mr. Biden in his State of the Union address on Tuesday night called fighting high prices his “top priority,” in a sign of how central it has become to the national discussion.

Prices are increasing at the fastest pace in 40 years, picking up by 7.5 percent over the year ended in January in the closely watched Consumer Price Index and by 6.1 percent when measured by the Fed’s preferred inflation gauge, the Personal Consumption Expenditures index. The central bank aims for 2 percent inflation on average over time.

“Demand is strong, and bottlenecks and supply constraints are limiting how quickly production can respond,” Mr. Powell said. “These supply disruptions have been larger and longer lasting than anticipated, exacerbated by waves of the virus, and price increases are now spreading to a broader range of goods and services.”

Mr. Powell said the Fed still expects inflation to cool off this year as government pandemic relief spending fades, interest rates increase and supply constraints clear up, but it is closely monitoring factors that could keep it high.

“We will use our policy tools as appropriate to prevent higher inflation from becoming entrenched while promoting a sustainable expansion and a strong labor market,” Mr. Powell said.