Powell Quick Analysis: US economy is on fire, war could impact policy both ways, dollar to rise

The Fed is far from hitting the panic button – that is the conclusion from Federal Reserve Chair Jerome Powell's prepared remarks to Congress. It contrasts with markets and could lead to further dollar gains.

Follow all the updates on Russia-Ukraine and the market impact

Powell has dedicated several comments to Russia's brutal invasion of Ukraine, but clarified that the impact to the US economy is "highly uncertain." Another comment is that "making appropriate monetary policy must recognize the economy evolves in unexpected ways" and that the bank will be monitoring the situation. There is nothing to suggest any change. 

Moreover, the only clear impact of the nearly weeklong war is that the price at the pump is set to surge. WTI Crude Oil surpassed the $100 level and hit a high of $112, even before Russia disrupted any supplies of the black gold. That is inflationary, suggesting more rate hikes. 

The Fed already witnessed how higher energy costs and supply chain disruptions propagated into higher prices of everything – from rent to manufactured goods and services. Therefore, it is not only headline inflation that is set to rise but also underlying prices. 

Another scenario is that the war triggers a global recession and forces the Fed to enact looser monetary policy – but that is nowhere to be seen in the text. On the contrary, Powell said the labor market is "extremely tight and that wages are rising at the fastest pace in many years. That is a picture of a steaming hot economy that creates inflation.

As tanks roll over Ukraine, investors seem to have forgotten about COVID-19, but Powell has offered a quick comment on that – saying the Omicron variant has had a minor impact on the economy. To conclude, Powell clarifies it will be appropriate to raise rates in March. 

Is a double-dose 50 bps increase to borrowing costs on the table? Not according to bond markets, nor to Powell – he does not mention it. Nevertheless, the Fed Chair and his colleagues are set to publish their "dot-plot" where they are likely to signal a faster pace of hikes. 

Overall, Powell is bullish on the economy, noncommittal about the war, and ready to raise rates. For stocks, that is an adverse development amid the global turmoil. The dollar is already on high ground but could go higher. The greenback advanced despite a drop in US bonds yields, which could now advance in response to the Fed's updated stance.