Federal Reserve Chairman Jerome Powell said Thursday that Russia's war in Ukraine could hit the U.S. economy through a variety of channels, from rising prices to curbing spending and investment, but it was unclear what the final impact would be.
"What we know so far is that commodity prices have risen sharply, especially in energy. This will be transmitted to the U.S. economy," Powell told the Senate Finance Committee, at least in the short term, rising inflation. "In addition, we may see a decline in risk sentiment and therefore may see a decrease in investment." It may be seen that people suppress spending. It's hard to see how this will affect both supply and demand. ”
Powell repeated testimony prepared for Wednesday's House Financial Services Committee hearing, and questions from members on the same day also focused on the impact of Russia's invasion of Ukraine.
Powell said the Fed is closely monitoring the situation and has begun to conduct simulations, for example, about the impact that a sustained rise in oil prices could have on the economy.
According to the rough rule of thumb provided by Powell, oil prices jumped from about $75 a barrel at the end of December to about $110 on Thursday, and if the rally continues, could increase overall inflation by nearly 0.9 percentage points and reduce economic growth by nearly 0.5 percentage points, a bad evolution at a time when the Fed is trying to lower inflation without hitting jobs.
But Powell said the war has not changed the Fed's plans to raise interest rates starting at its March meeting to limit the rate at which prices are rising. The current year-on-year price increase is three times the Fed's 2 percent target.
Powell said: "It is appropriate for us to continue to act in the same way that russia was before it invaded Ukraine." He reiterated his statement on Wednesday that he would support a 25 basis point hike in the benchmark rate at the March 15-16 meeting.
But Powell said that if inflation does not ease, "then we are prepared to raise interest rates beyond that in one or several meetings." ”
Lawmakers questioned the new situation the Fed is facing, as well as the more difficult scenario it may face: the scenario in which war pushes up inflation while economic growth slows.
Senator Pat Toomey, Republican of Pennsylvania, said, "I'm a little concerned that this war has changed the risk profile. ”
Powell said there is "a great deal of uncertainty on both sides of supply and demand," but he also noted that the "strong financial position" of households and businesses could help sustain spending.