Federal Reserve chair Jerome Powell begins two days of testimony on Capitol Hill Wednesday morning. It will be, in a word, fraught.
Driving the news: Powell and the Fed are at the center of an extraordinary collision of economic and geopolitical forces — and they don't have any good options. Adding to the pressure, Powell himself is still awaiting Senate confirmation for a second term.
Why it matters: Powell faces a high-wire act. He'll seek to signal that the Fed is resolute in its plans to try to rein in inflation, yet flexible enough to respond if the Ukraine crisis damages the economy.
The big picture: The Fed has been on course to begin its rate-raising campaign at its policy meeting two weeks from now. Nine days ago, the open question was whether it would kick things off with a quarter-percentage point rate hike or a half-point.
- The Russian invasion of Ukraine, however, has thrown a wrench in those calculations. Global markets have been upended by the war, and by the U.S. and its allies' concerted efforts to effectively cut Russia off from the global economy.
- The Fed is generally reluctant to raise interest rates at a moment of crisis, especially when the economic ripple effects are not yet clear.
State of play: The first-order effects of this particular geopolitical crisis will be to make America's inflation problem worse, at least in the next few months.
- Prices of oil, natural gas, grain, corn and many other commodities have soared in recent weeks, and there is nothing the Fed can do to prevent those price adjustments from filtering through to more expensive consumer goods.
- Normally, one-off surges in commodity prices are something the Fed would look through in setting policy — but it comes at a terrible moment, amid signs that inflationary psychology could become entrenched. That's a case for raising rates more aggressively.
Go deeper: If the Ukraine crisis acts as a brake on global growth, Fed rate increases could make it worse.
- If rates go too high too fast, it might actually be counterproductive in the fight against inflation, specifically if tighter financial conditions hold back domestic oil and gas drilling and other investment in supply.
Meanwhile, Powell's confirmation is still pending in the Senate, held up by Republican opposition to other nominees. That makes the two-day semiannual monetary policy hearing also a de facto two-day follow-up confirmation hearing.
The bottom line: There are times it seems like it would be pretty cool to be a powerful central banker. This is not one of them.
