Federal Reserve is unlikely to change course after Ukraine’s invasion

Federal Reserve officials are turning wary of Russia’s invasion of Ukraine, though some have signaled in recent days that geopolitical tensions are unlikely to cause them to withdraw their support. support for the US economy at a time when the job market is booming and prices are falling. climb quickly.

The stock index is ecstasy and price Key commodities – including oil and gas – have surged and may continue to rise as Russia, a major producer, responds to US and European sanctions.

That makes invasion a complicating risk for the Fed: On the one hand, its decline is likely to continue to push up price inflation, which is already running low. fastest rate in 40 years. On the other hand, it could hurt growth if stock prices continue to plummet and make consumers in Europe and the United States nervous about pulling back on spending.

The extent of the potential economic impact is far from certain, and for now, the central bank the officials signaled that they will continue to raise interest rates starting next month, a policy move that will make borrowing more expensive and cool the economy.

“I see the geopolitical situation, unless it will significantly deteriorate, as part of the greater uncertainty we face in the United States and our U.S. economy,” said Mary C. Daly, president of the Federal Reserve Bank of San Francisco, said Wednesday at an event hosted by the Los Angeles World Affairs Council. “We’ll have to navigate that as we move on.”

Daly said she doesn’t “see anything right now” that could disrupt the Fed’s plans to raise rates.

Raphael Bostic, president of the Federal Reserve Bank of Atlanta, said at an event on Tuesday that the situation in Ukraine presents “downward risks” to growth, but suggested he remains in favor of a withdrawal some of the Fed’s help from the economy.

Both Mr Bostic and Ms Daly reiterated on Thursday that they expect the support removal to be appropriate. Thomas Barkin, president of the Federal Reserve Bank of Richmond, said in an appearance on Thursday that “time will tell” whether policy direction needs an adjustment.

Some analysts are warning that the consequences of the conflict could be significant.

Krishna Guha at Evercore ISI wrote in a research note on Thursday morning: “Typically, geopolitical crises end up being a blur for financial markets and a buying opportunity for investors. willing to look through the headlines. “We’re very wary of using that line today.”

Mr. Guha noted that Invasion can interrupt the post-Cold War world order and warned that soaring energy prices and the impact of sanctions “will further complicate the ability of central banks on both sides of the Atlantic to establish plan a gentle landing in the face of pandemic inflation.”

Economists have warned that a “soft landing” – in which central banks guide the economy on a sustainable path without triggering a recession – could be difficult to achieve at a time when prices and monetary policies across much of Europe and North America have softened. Substantial readjustment may be required.

Isabel Schnabel, an executive board member at the European Central Bank, said at a European Central Bank event on Thursday: “The shock of war adds to the enormous challenges that banks face. Central banks around the world have to face. She added that policymakers were monitoring the situation in Ukraine “very closely”.

Inflation is at a high around the world and although it is less pronounced in Europe and ECB policymakers are reacting more slowly to some of their global counterparts, recent high reads There are some officials who have reminded towards policy changes.

In the US, the Fed sometimes responds to global problems by cutting borrowing costs, making money cheaper and easier to earn, rather than raising interest rates and tightening credit conditions. But economists say this time is likely to be different.

“The current situation is different from previous periods when geopolitical events prompted the Fed to delay tightening or easing as inflation risks have faded,” Goldman Sachs researchers wrote in an analyst note. creates a stronger and more pressing reason for the Fed to tighten today.”

Add to that, with wages rising and consumers increasingly expecting high inflation in the years to come, the fact that the conflict is likely to drive prices up further could leave the central bank in trouble.

“Further increases in commodity prices may be more worrisome than usual,” they wrote.

Some economists warn that Russia’s invasion in some way echoes the inflationary run of the 1970s: Back then, oil prices rose rapidly, and a sharp rise in oil prices pushed inflation higher. and cause it to continue to increase. The Arab oil embargo of 1973-74 and the Iranian revolution of 1979 both contributed to oil supply shortages.

Diane Swonk, chief economist at Grant Thornton, “There’s something oddly reminiscent of the 1970s and the rise in energy prices associated with Russia’s invasion of Ukraine.” wrote on Twitter Thursday. “It couldn’t have come at a worse time because it is fueling the fire of inflation that has already flared up.”

Economists have offered varying estimates of how much an oil price shock could boost inflation in the coming months.

If oil rises to $120 a barrel by the end of February, breaking past the $95 mark it wavered last week, inflation as measured by the Consumer Price Index could rise to nearly 9% over the next few months. , rather than the expected peak, said Alan Detmeister, an economist at UBS who previously led the prices and wages department at the Fed.

As a general rule, a $10 per barrel increase in oil prices would increase key inflation in the United States by about one-fifth of a percentage point and slow gross domestic product growth by just one-fifth of a percentage point, the Goldman researchers say. less than 0.1 percentage point. .

“The growth impact could be slightly larger if geopolitical risks tighten financial conditions and increase uncertainty for businesses,” they wrote.

https://www.nytimes.com/2022/02/24/business/economy/interest-rates-russia-ukraine.html Federal Reserve is unlikely to change course after Ukraine’s invasion

Fry Electronics Team

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