Fed Chair Jerome Powell told Congress on Wednesday that he supports a quarter-percent increase in the Fed’s benchmark short-term interest rate when the Fed meets in less than two weeks.
Powell did open the door to a bigger hike, like the half-percent increase called for by most of his colleagues, but only if inflation doesn’t noticeably decline this year—as the Fed expects it to.
Most other Fed officials have vocally supported a 25-basis point rise.
By Dave Allen for Discount Gold & Silver
Fed Chair Jerome Powell told Congress on Wednesday that he supports a quarter-percent increase in the Fed’s benchmark short-term interest rate when the Fed meets in less than two weeks.
Powell did open the door to a bigger hike, like the half-percent increase called for by most of his colleagues, but only if inflation doesn’t noticeably decline this year—as the Fed expects it to.
Most other Fed officials have vocally supported a 25-basis point rise.
A few others—like Atlanta Fed Prez Raphael Bostic (a nonvoting member of the policymaking Federal Open Market Committee this year)—say they’re open to 50 basis points.
The last 50bp hike came under the Alan Greenspan Fed in 2000.
Higher Fed rates typically lead to higher borrowing costs for consumers and businesses, including for home mortgages, auto loans and credit cards.
Powell told members of the House Financial Services Committee, “To the extent inflation comes in higher, then we would be prepared to move more aggressively” (i.e., by raising rates more than a quarter point).
He also cautioned that the impacts of Russia’s invasion of Ukraine and the resulting sanctions by the U.S. and Europe, are “highly uncertain” and said “it’s too soon to say” how they might affect the Fed’s policies.
Before Russia crossed the line (literally and figuratively), the Fed planned to carry out “a series” of rate increases this year, Powell said, potentially at each of the remaining seven Fed meetings this year.
For now, he added, the Fed will “proceed carefully along the lines of that plan.”
Fed watchers (i.e., CME futures traders) are predicting the Fed will implement 5-7 quarter-point hikes this year, totaling as much as 1.75 percentage points (with more to come in 2023-2024).
Powell spoke the day after President Biden said in his State of the Union address that “my top priority is getting prices under control.”
This month’s Fed hike will be the first since 2018. And it would mark the beginning of a delicate challenge for the Fed.
It wants to increase rates enough to reduce inflation but not so fast as to choke off growth and hiring and throw the country back into recession.
Powell is betting that with lower unemployment and consistent consumer spending, the economy can withstand modestly higher borrowing costs.
Responding to a question from Rep. Roger Williams of Texas, Powell said he believes the Fed can reduce inflation without tipping the economy into recession.
One reason he thinks so, Powell said, is that the economy is strong now, with solid growth and the unemployment rate low.
He told the committee the Fed expects inflation to gradually decline this year as tangled supply chains unravel and consumers pull back their robust spending.
Will Sanctions Lead to Resurgence of the Dollar?
As Powell pontificates to Congress, some analysts are saying the multiple sanctions now hammering Russia's currency, banks and economy strongly suggest the power of the U.S. dollar and its resurgence.
They say it's a glimpse into the often invisible — but incredibly valuable — influence the dollar has around the world.
On February 24th, the U.S., EU, UK and Canada imposed a barrage of severe sanctions—from barring Russia’s largest banks from using the international SWIFT payment system for financial transactions to freezing the assets of the Russian central bank.
The ruble has dropped over 30% in the last 10 days, hitting a record low. Russians are lining up to withdraw cash from ATMs across the country.
Russia's government itself might not be able to make payments on its dollar-denominated bonds, causing a default on its sovereign debt.
The sanctions pack a Pacquiao Punch because they cut off Russia's unrestricted access to the U.S. dollar which, like it or not, all modern economies need to function.
Russia relies on its central bank and its commercial banks to provide the source for the dollars it needs. Sanctions will certainly make that harder.
But some say cutting off Russia's access to dollars — thus, weaponizing the currency — could push countries like China and Russia to create a parallel system that avoids using it…
Although that would be a somewhat time-consuming and expensive proposition, but certainly doable.
Dylan Grice, a hedge fund manager in the U.K., said, "Never seen weaponization of money on this scale before…you only get to play the card once. It’s a turning point in monetary history—the end of U.S. Dollar hegemony.”
Guess these ideas are having a moment. In fact, several market observers are saying the era of dollar dominance could be cut short by overzealous sanctions.
But don't hold your breath, responds Abraham Newman, a Georgetown University political science professor who has studied how global financial systems can become a source of political power.
He says the dollar system isn't a top-down invention of world leaders. Rather, it developed organically over decades when private investors, traders and businesses decided that they preferred to use dollars.
Why? Because they view the dollar as a relatively stable, easily traded currency in a country with an accountable government and transparent legal system. Well, ok then.
On the other side, China's fiat currency, the yuan — recently thought to be a potential rival to the dollar — has few of those advantages, largely because of the Chinese government's authoritarian nature.
The bottom line? There's a long history of people looking for alternatives to the dollar. The thing is, except for gold it doesn't exist. And that, they say, is a source of strength for the U.S.
Others, however, might argue, a fiat currency can never be a strength. Or, it’s a strength with a lot of weaknesses.
Gold and silver are on the verge of ending another week up, up and away.
Since last Friday, gold has risen $129 or 7.1%, from $1,808 to yesterday's close of $1,937.
Silver has done even better, rising $2.62 or 11.6%, from $22.52 to $25.14 over same time period.
Don’t wait for gold and silver to surge to the next level; consider adding more to your portfolio now to lock into today’s prices.