The Federal Open Market Committee Chair Jerome Powell and the Federal Reserve are certainly in a tight situation as they battle with high inflation at the same time that a conflict is brewing in Europe between Russia and Ukraine. Additionally, the placement of strict economic and financial sanctions is increasing risks as evidenced by heavy losses in bank stocks. Of course, the normal remedy of injecting liquidity runs counter to its goals of removing liquidity to contain inflation.
Thus, Powell's testimony before the House Financial Services Committee was heavily anticipated to see whether or not the conflict could have any impact on the path of monetary policy. Fed fund futures have already pulled back on expectations of a 50 basis points hike in March and lowered the estimates of hikes in 2022 from 6 to 7 to 5 to 6.
However, Powell weighed his words carefully. He emphasized that rate rises would begin "carefully" but could accelerate based on developments. He also said the Russian invasion was a potential "game changer" but it was too soon to assess the impact.
Therefore, the Fed is focused on reducing its balance sheet and beginning the rate hike process. He seemed open to the idea of bigger hikes or intra-meeting hikes if necessary. It's a sign that the Fed's focus has done an almost 180 turn over the last 2 years.
Powell sees the jobs market as "tight" and that they are essentially at their full employment goal. In contrast, inflation is at 6% and is now the biggest political issue. Additionally, it's likely to get worse given recent moves in energy, food, and metal prices.
In regards to the Russia-Ukraine conflict, he said, "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, Making appropriate monetary policy in this environment requires a recognition that the economy evolves in unexpected ways. We will need to be nimble in responding to incoming data and the evolving outlook."
Another focus for legislators was the potential of financial institutions to withstand a cyberattack. Powell responded that they are monitoring threats and have instituted some safeguards.
In response to Powell's testimony, U.S. stocks had a strong day with the S&P 500
