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Ukraine was risking inflation spike, Fed’s Powell warns

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Federal Reserve Chairman Jerome Powell said that Russia’s invasion of Ukraine was likely to push up inflation, a setback to central bank expectations that price pressures would diminish in the coming months.

Because of Russia’s role in global energy and other commodity markets, “we’re going to see upward pressure on inflation at least for a while,” Powell told the Senate Banking Committee on March 3.

The war, escalating sanctions by the West, and other steps businesses are taking on their own to withdraw from Russia could also lead to declines in financial risk-taking that could reduce investment, he said. “We need to be alert and nimble as we make decisions in what is quite a difficult environment,” he said.

Powell, who is awaiting a Senate confirmation vote for a second four-year term, also indicated that the central bank would not tolerate a significant interval of higher inflation, even if that required interest rates to rise to levels that choked off economic growth.

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Senator Richard Shelby pushed Powell to say whether he would follow the example set in the 1980s by former Fed chairman Paul Volcker, who raised rates high enough to tame inflation, even though it caused a recession. “I would hope history will record that the answer to your question is yes,” said Powell.

Before a House panel on March 2, Powell offered an unusually explicit preview of anticipated policy action when he said he would propose a quarter-percentage-point interest-rate increase at the central bank’s meeting in two weeks amid high inflation, strong economic demand and a tight labor market.

That effectively ended speculation over whether the central bank might start raising rates with a larger, half-percentage-point increase. At the same time, he laid the groundwork for the possibility of half-point increases this summer, pushing back against the idea that more traditional quarter-point increases represent a speed limit for the Fed.

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Consumer prices in January rose 6.1% from a year earlier, according to the Fed’s preferred gauge. Excluding volatile food and energy categories, so-called core inflation rose 5.2%, close to a 40-year high.

On March 3, Senator Pat Toomey, the top Republican on the banking panel, told Powell that he was concerned that the war in Ukraine would drive inflation higher. “I fully acknowledge nobody knows how this is going to play out, but I think it’s fair to say that this war has changed the risk profile a little bit with respect to inflation,” he said.

Fed officials have grown anxious because of signs labor markets are overheating, with wage gains well above their pre-pandemic highs, and the risk that consumers and businesses will expect larger price increases in the future, which could foster persistently higher inflation.

“There’s already a lot of upward inflation pressure and additional pressure does probably raise the risk that inflation expectations will start to react in a way that is negative for controlling inflation,” Mr. Powell said.

Powell also said the Ukraine war had made him more pessimistic about the prospect for any near-term improvement in disrupted supply chains. “We’ve been waiting for that to happen, and it has not happened,” he said.

Fed officials last spring and summer attributed most of the rise in inflation to supply-chain bottlenecks, which would not necessarily demand a policy response if those kinks were expected to resolve themselves in a few months.

Fed officials began taking steps to withdraw stimulus last fall, and accelerated that process in December, as inflationary pressures remained strong and labor markets healed rapidly. “Hindsight says we should have moved earlier, but there really is no precedent for this,” Powell said.

Write to Nick Timiraos at nick.timiraos@wsj.com

This article was published by Dow Jones Newswires

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