[Summary] US Interest Rate Hike in 2 Weeks Supported at '0.25%p'... Powell Clearly Stated

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[Asia Economy New York=Special Correspondent Joselgina] Jerome Powell, chairman of the U.S. central bank, the Federal Reserve (Fed), has made a rate hike at the upcoming March Federal Open Market Committee (FOMC) meeting two weeks from now a foregone conclusion. He reaffirmed his intention to begin a tightening stance in earnest starting this month, despite the heightened economic uncertainty caused by Russia's invasion of Ukraine. Notably, he unusually specified a concrete increase of "0.25 percentage points," effectively ending the ongoing debate over a "big step" (0.50 percentage point hike).

◇ Powell Confirms "March Rate Hike" ... Supports 0.25%p Increase, Draws Line Under Big Step

On the 2nd (local time), at a House Financial Services Committee hearing, Chairman Powell stated, "Due to inflation and a strong labor market, I believe it is appropriate to raise the target range for the federal funds rate at this month's FOMC meeting." This would mark the first rate hike since December 2018. Currently, the U.S. benchmark interest rate stands at 0.00?0.25%.

Powell also presented a specific increase amount, saying, "I support a 0.25 percentage point rate hike." By drawing a line under the big step debate concerning the Fed's recent tightening pace, he signaled a "cautious tightening." The so-called big step of a 0.5 percentage point increase was last implemented in May 2000 during the dot-com bubble. Major foreign media outlets evaluated, "It is very unusual for Chairman Powell to mention the size of the increase itself," and "He effectively ended the internal Fed debate over the hike size."

Alongside this, Powell explained that if inflation in the U.S., which is at its highest level in 40 years, remains persistently high, the Fed is prepared to act more aggressively. Besides rate hikes, the Fed's other tool includes balance sheet reduction, known as quantitative tightening (QT). However, he added that the schedule for balance sheet reduction would not be decided at this month's meeting.

◇ Inflation Concerns Rise Due to Ukraine Crisis... CPI Next Week in Focus

Powell's unusual mention of the rate hike size and confirmation of the monetary tightening path is interpreted as a response to the recent increased market uncertainty. Immediately after his remarks, all four major indices on the New York Stock Exchange closed higher, and U.S. Treasury yields surged. Ryan Detrick of LPL Financial Research said, "The 0.25 percentage point comment can be read as somewhat dovish signaling for future monetary policy."

Investors and market experts are also paying attention to the Fed's clear signal of a rate hike this month despite the fallout from Russia's invasion of Ukraine. Powell described the invasion as a "game changer," but showed caution by saying it is "too early to speak about the impact" on the U.S. economy. Regarding policy operation, he emphasized a fundamental stance of monitoring data closely and responding swiftly.

However, concerns continue that the Ukraine crisis, leading to a sharp rise in oil prices, will further fuel inflation in the U.S. In that case, the Fed's tightening stance will inevitably accelerate. Kathy Bostanich, an economist at Oxford Economics, analyzed in a report released that day, "Chairman Powell implied that if inflation rises further or persists longer than expected, the possibility of a 0.50 percentage point increase at subsequent FOMC meetings (after March) has been put on the table."

On the same day, the Fed released the Beige Book, a report on economic conditions, stating, "Consumer prices have risen across the U.S.," and "Businesses expect further price increases over the coming months." Following a 7.5% year-over-year surge in the January Consumer Price Index (CPI), the February CPI, scheduled for release next week, is expected to rise further due to the impact of the Ukraine crisis.

Meanwhile, ahead of the Fed's rate hike, the Bank of Canada raised its benchmark interest rate from 0.25% to 0.5% that day. This marks the first rate increase since October 2018.

This content was produced with the assistance of AI translation services.