Fed Will ‘Proceed Carefully’ with Rate Hikes Despite Ukraine War

The US Federal Reserve (Fed) will “proceed carefully” with its plan to hike interest rates this year despite the war in Ukraine, with the first hike of 0.25 percentage points still expected at the Fed’s next meeting in March, Fed chair Jerome Powell said during a hearing in Congress today. 

“We can’t know how large or persistent” the effects of the war will be on the economy, the Fed Chair said.

“We expect it will be appropriate to raise the target range for the federal funds rate at our meeting later this month,” Powell said, adding that he is “inclined to propose” a 0.25 percentage points rate hike.

Bitcoin (BTC) jumped from around USD 43,500 to almost USD 44,970 prior to the testimony as written remarks by Powell started to circulate. At 17:33 UTC, BTC traded at USD 44,160 and was up almost 2% in a day and 15% in a week.

Despite being committed to following the plan for the first rate hike, however, Powell was less clear about later rate hikes when asked by members of the House of Representatives Financial Services Committee.

It is “highly uncertain” how the war in Ukraine will affect monetary policy in the US going forward, Powell said. However, he noted that he still believes it is “appropriate to move ahead” because inflation is “too high.”

“We continue to expect inflation to decline over the course of the year as supply constraints ease and demand moderates because of the waning effects of fiscal support and the removal of monetary policy accommodation,” the Fed chair said.

Moreover, Powell said that if inflation does not come down, the Fed will be prepared to raise rates by more than 0.25 percentage points at one or more meetings in order to get price increases under control.

Meanwhile, the situation in Ukraine was also touched upon by Powell in his opening statement, where he said that the implications of the war for the US economy are “uncertain,” while adding that the Fed is “monitoring the situation closely.”

“There may well be unintended and unexpected effects,” Powell said when asked about the effects of sanctions placed on Russia. 

Overall, however, the impact will probably be small, but it is hard to predict what the second-order effects will be, Powell said.

Despite the uncertainty, the Fed chairman reiterated the central bank’s intention to raise interest rates at the next scheduled meeting on March 16.

Asked if Russia could potentially use cryptoassets as a way to evade sanctions, Powell said this is “something you read about and hear about,” before noting that a regulatory framework would help to prevent this.

There isn’t in place the regulatory framework that needs to be there. A framework should be in place to make sure crypto cannot be used for criminal purposes and to evade sanctions, Powell opined.

As reported, finance ministers from the G7 and EU are working on preventing Russia from using cryptoassets to circumvent sanctions.

The way the Fed chair’s testimony dealt with interest rates led the well-known economist and President of Queens’ College, Cambridge University, Mohamed A. El-Erian, to write that it is “hard to see Fed Chair Powell being definitive beyond March […]” when it comes to interest rate increases.

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Watch the entire hearing with Fed Chair Jerome Powell below:

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Learn more: 
– Russian Consumers, Firms Feeling Impact of Sanctions as Ruble Keeps Diving
– Bitcoin, the Ukraine Crisis and the Central Bankers Dilemma

– Ukraine War: How Russian Aggression Could Derail the Fragile World Economy
– With War Starting and Markets Dropping, Questions Multiply About Central Banks’ Policies