The war in Ukraine is sending shockwaves across the global economy, but Federal Reserve Chair Jerome Powell is sticking to the plan. 

Testifying before the House Financial Services Committee on Tuesday, the chair said that the Fed will proceed with a 25 basis point rate hike at the upcoming FOMC meeting. 

"I do think it will be appropriate to raise our target range for the Federal Funds Rate at the March meeting in a couple of weeks, and I'm inclined to propose and support a 25 basis point rate hike," he said. 

At the same time, Powell stressed that the Fed is not on "autopilot" and will remain flexible given the "highly uncertain" economic impact of the situation in Ukraine. 

"The bottom line is that we will proceed, but we will proceed carefully as we learn more about the implications of the Ukraine war for the economy," he said. 

He added that beyond a 25 basis point hike this month, the Fed will proceed with additional hikes based on the level of inflation. He also maintained that inflation will peak and then start coming down within the year. 

Powell testified as the stock market whipsawed into positive territory on Wednesday afternoon,  despite news that the conflict in Ukraine was intensifying and driving up commodity and oil prices to their highest levels in more than a decade. 

The chair recognized the war's potential impact on the world economy, while noting that the Fed "can't know how large or persistent those effects will be."

Role of Supply Chains

Powell said the Fed is committed to price stability and will use its monetary tools to try to bring down inflation, which hit a nearly 40-year high in January. 

Rep. Maxine Waters (D-Calif. 43rd District), chair of the House Committee on Financial Services, pressed Powell to explain how rate hikes — which historically cause recessions — could bring down inflation given that the Fed and most economists agree that supply chain issues are responsible for the lion's share of price increases. 

"These supply chain constraints seem likely to only significantly increase as Russia invades Ukraine, and the full effect of our sanctions take hold," she said. "If the Fed's tools are mostly useful in stimulating or constraining demand, how can we expect monetary policy to rein in inflation that is largely driven by supply side factors?"

Powell responded that while supply chains woes are still the main culprit, elevated demand is also contributing to inflation, and that is where the Fed can intervene. 

So far, this has meant winding down the Fed's monthly asset purchases, which were introduced early in the pandemic to stabilize the economy. Now that those purchases are set to end this month, the Fed is turning to interest rates. 

Powell recognized that inflation has been more elevated than expected, but said that it was a common mistake among central banks. 

"Every other mainstream economist and central bank around the world made the same mistake," he said. "That doesn't excuse it but we thought that these things would be resolved long ago."

Fiscal vs. Monetary

However, some lawmakers are critical of this approach, and Waters and other Democrats made the case during the hearing for alternative approaches, such as passing legislation to increase the housing supply or expand capacity at ports.

"It seems clear that the Fed has limited tools to address inflation, and that Congress has an important role to play," Waters said. 

These comments echo President Joe Biden's State of the Union address on Tuesday night, which outlined an ambitious plan to invest in infrastructure, bring manufacturing jobs back to the U.S., and rein in health care costs with price controls, to name a few.  

While avoiding any reference to specific legislation, Powell agreed that fiscal policy can have an impact in the "medium or longer-term," but that monetary policy was still the best tool to tackle higher prices. 

"The Fed does monetary policy, and inflation is largely a monetary phenomenon, and it's our tools that can be used to address inflation," he said. "Over time though, of course, anything that expands the productive capacity of the United States over time would, in principle, make greater potential output and a less constraining economy." 

Republicans, meanwhile, criticized Democrats for proposing more federal spending as an answer to inflation, and urged the Fed to move ahead with rate hikes. 

"As one of your predecessors famously said, the Fed's job is to take away the punch bowl  just as the party starts to warm up, but the Democrats have drunk deep and they want to move on to the harder stuff," said Rep. Patrick McHenry (R-N.C. 10th District). 

Crypto Comments

The topic of central bank digital currencies also came up during the hearing.  

Rep. Jim Himes (D-Conn. 4th District) said it was "past time" for the U.S. to take a leadership role in creating a regulatory environment that will help the country benefit from the rise of crypto. 

"I can't shake the image of 17th century bankers, sitting around London unable to imagine that their gold pieces and copper plates could be replaced by these worthless pieces of paper," he said. "Let's not be those guys. Let's lead, and not follow." 

Powell said the Fed was continuing to weigh the pros and cons of a central bank digital currency. 

"I do want to stress, we have not decided to do it, but we do understand our obligation is to really get to the bottom and understand both the technical and the policy issues that need to be answered," he said.  

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