Despite the ongoing conflict in Ukraine, Federal Reserve Chair Pro Tempore Jerome Powell plans to raise rates by 25 basis points this month.
The first rate increase is expected in a little less than two weeks, coinciding with the March Federal Open Markets Committee meeting, scheduled for March 15 and 16.
President Joe Biden also outlined a plan to reduce inflation including by reducing prescription drug and childcare costs, and creating affordable housing, at the State of the Union address. Biden said he would “go into more detail later.”
In the short-term, however, the federal government’s primary toolkit to reduce inflation is rate reductions by the Federal Reserve. That was the focus of a marathon House Financial Services Committee hearing Wednesday.
At the three-plus hour hearing, Powell said he would “support a 25 basis point rate hike.”
He also said that it’s possible the central bank would move even more aggressively, by raising rates more than 25 basis points, if inflation remains elevated. Analysts had previously predicted rate hikes of as much as 50 basis points in March.
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Lawmakers also questioned Powell on how the conflict in Ukraine would impact the Fed’s policy.
Economists have said that the conflict in Ukraine could bring a short-term reduction in mortgage rates, as investors flock to safe haven assets like mortgage-backed securities and bonds. But longer term inflation brought on by the conflict will cause mortgage rates to rise.
Powell, in his testimony, said the “near-term effects on the U.S. economy of the invasion of Ukraine, the ongoing war, the sanctions, and of events to come, remain highly uncertain.”
“Making appropriate monetary policy in this environment requires a recognition that the economy evolves in unexpected ways,” Powell said.
Powell also took questions from lawmakers about housing affordability. While housing policy is not the realm of the Fed, controlling inflation is part of its dual mandate. Since housing costs make up a large portion of indices measuring inflation, the Federal Reserve is concerned with rising home prices.
Home prices, Powell said, will grow more slowly as the federal funds rate rises, pulling mortgage rates up with it. But he has no expectation that home prices would return to pre-pandemic levels, he said.
“We won’t get back to pre-pandemic levels,” said Powell. “We’re not trying to get prices back down, we’re trying to limit future prices.”
Some members of Congress also commented on the future of Powell’s re-nomination to the Federal Reserve, which hit a snag two weeks ago when Republican Senate Banking Committee members refused to show up for a vote.
Republican members blamed the debacle on Democrats for refusing to split up the slate of nominees, to allow some of the nominees to be confirmed. Republican members have said they will not allow the vote to proceed until Sarah Bloom Raskin answers questions about business dealings.
Biden, in his Tuesday evening address, urged lawmakers to go ahead with the nominations in light of concerns over rising prices.
“And while you’re at it, confirm my nominees for the Federal Reserve, which plays a critical role in fighting inflation,” Biden said.
Powell will also testify before the Senate Banking Committee on Thursday.