Fed Chair Powell supports 25-basis-point March rate hike

Yahoo Finance's Brian Cheung recaps Fed Chairman Jerome Powell's testimony before Congress, which touched on inflation, Fed rate hikes, and the impact of the Russia-Ukraine war on the U.S. economy.

Video transcript

KARINA MITCHELL: Listen, we are just wrapping up testimony from Fed Chair Jay Powell. He was on Capitol Hill as part of his biannual monetary policy hearings. And top of the agenda, of course, how to ensure inflation does not become entrenched in the economy.

He just wrapped up day one. Here with more, let's bring in our Brian Cheung. And Brian, Powell says there are tools in the box to make sure that doesn't happen, but warned of uncertainty tied to the Ukraine conflict.

BRIAN CHEUNG: Yeah, well, certainly the uncertainty is high as the Fed chairman described it in that hearing to the House Financial Services Committee, which you saw just wrapped up a few seconds ago. The Fed chairman saying, quote, bottom line is we will proceed-- "we will proceed carefully as we learn more about the implications of the Ukraine war."

Of course, this coming only two weeks ahead of the Fed's next policy setting meeting. That will be on March 15th and March 16th where the Fed chairman laid out very clearly that he's supporting a 25 basis point hike. Again, 0.25% of an increase, the first increase in Fed funds rate since really 2019.

So the Fed chairman said the money, quote here, quote, "I'm inclined to propose and support a 25 basis point rate hike." And for those that are wondering, this is relatively unprecedented. You don't usually see the Fed chairman say this is exactly what I'm going to support two weeks before a Fed announcement, and especially when you consider the fact that we're still due to get an employment report this Friday, and then another read on inflation next week, both of which could come in relatively hot.

So the Fed chairman trying to commit the Federal Reserve to a standard size interest rate increase, which would likely take a little bit of wind out of the expectation that we had seen earlier in February for perhaps a 50 basis point or a double rate bump. You can take a look at Fed funds futures markets now. Essentially no one is any more pricing in the chance of a 50 basis point hike in that meeting. So the Federal Reserve charting a course ahead for that policy in that meeting in two weeks, guys.

ALEXIS CHRISTOFOROUS: Well, Brian, certainly a very transparent Powell today before lawmakers. So maybe we don't get the 50 basis point hike in March, but he has left the door open for more aggressive hikes later in the year, especially if the situation in Ukraine begins to wrap up in the coming weeks.

BRIAN CHEUNG: An absolutely critical point that you bring up there. The Fed chairman was asked later on if he saw 25 basis points as the ceiling for future Fed moves, even if he only supports a standard size move in the next meeting in two weeks, and the Fed chairman said, look, anything's on the table when it comes to responding to inflation down the line. So it's possible that if the Federal Reserve wanted to move and launch its first post-COVID rate hike in March, that it could still leave the option on the table for a 50 basis point move in the next meeting, which would be in May, or maybe in June, or in the other policy setting meetings that we're expecting to see later in 2022.

He said that the response is really going to be all about inflation. And of course, how does the Ukraine and Russia situation play into that? One possible reading would be higher energy prices as a result of the sanctions on Russia could further exacerbate the price increases that we'll see.

Again, we might not see that until the CPI reports later into the spring and then into the early summer. But if that is the case, the Fed chairman saying, look, the Federal Reserve has the tools to raise interest rates by more than 25 basis points at a time to make sure that we get this very critical question of inflation back down to more comfortable levels for Americans.

ALEXIS CHRISTOFOROUS: Now threading the needle there, Fed Chief Jay Powell. All right, Brian Cheung, thanks so much for wrapping up that testimony. Day one for Powell.