Ukraine war impact on US economy 'highly uncertain:' Fed's Powell

The impact of the conflict in Ukraine on the US economy is "highly uncertain," and the central bank will need to adjust quickly to ensure the post-pandemic recovery continues, Federal Reserve Chair Jerome Powell said Wednesday.

With prices rising at the fastest pace in four decades and oil soaring above $100 a barrel due to the war, the Fed chief repeated that policymakers are ready to raise interest rates to tamp down inflation.

However, "The near-term effects on the US economy of the invasion of Ukraine, the ongoing war, the sanctions, and of events to come, remain highly uncertain," he said in his semi-annual testimony to Congress. "We will be monitoring the situation closely."

Fed officials in recent days have indicated they may be more cautious about raising the benchmark borrowing rate to cool the economy amid the renewed uncertainty. While rising oil prices could fuel faster inflation, sanctions on Russia over the invasion and other spillovers could slow the economic recovery.

Setting policy in the current environment "requires a recognition that the economy evolves in unexpected ways," Powell said, adding, "We will need to be nimble in responding to incoming data and the evolving outlook."

Long expansion

Powell, who is set to appear before the House Financial Services Committee on Wednesday, said the central bank's goal is to "promote a long expansion" to ensure all segments of society benefit from the growing economy.

But "high inflation imposes significant hardship" on Americans and the Fed will use all its tools to ensure the higher prices do not become entrenched, he said.

The inflation wave has been driven in large part by supply chain bottlenecks that "have been larger and longer lasting than anticipated."

While Powell said the Fed expects inflation "to decline over the course of the year as supply constraints ease... we are attentive to the risks of potential further upward pressure" on prices.

In addition to rising oil prices, other commodities, including wheat, could also spike due to the war.

The Fed slashed the benchmark lending rate to zero at the start of the pandemic, and flooded the financial system with cash in an effort to stave off a severe recession.

Together with massive federal spending programs, that effort was largely successful: the economy bounced back quickly, with growth of 5.7 percent in 2021.

But high demand, supply chain snarls and labor shortages have combined to push the Fed's preferred inflation index to 6.1 percent in the year ended in January, far above the 2 percent target.

In addition to the supply struggles, businesses report continuing problems finding enough workers to ramp up production to meet strong demand.

"The labor market is extremely tight," Powell said, with unemployment at four percent. And "an unprecedented number of workers are quitting to take new jobs, and wages are rising at their fastest pace in many years."