War in Ukraine complicates US Fed’s inflation brakes
The uncertainty created by Russia’s invasion of Ukraine and its effects on the global economy adds to the complexity of the U.S. central bank’s relentless fight to contain rising prices.
Soaring energy and food costs have pushed inflation in the world’s biggest economy to its highest pace in four decades, and the US Federal Reserve is set to hike its rate next month borrowing reference to put out the fire.
However, while the Russian-Ukrainian conflict is further driving up oil prices, it is also threatening to undermine an economic recovery from the COVID-19 pandemic.
“It creates a period that was always going to be all the more difficult,” said former Fed Vice Chair Erica Goshen.
Fed policymakers are “probably watching the data very closely. It adds a few more considerations into the pot,” said Goshen, a senior economics adviser at Cornell University’s School of Industrial and Labor Relations.
Crude prices briefly topped $100 a barrel on Thursday after Russia launched its invasion, the first time it topped that benchmark since 2014.
Wheat prices could also rise, as Ukraine is one of the world’s leading grain exporters.
The U.S. economy grew 7% last year, but the Fed’s favorite inflation index jumped to 6.1% in the year ending last month, well above the l 2% target.
To contain the surge in energy, housing, vehicle and food prices, Fed officials have been bracing financial markets for possible rate hikes for weeks, hoping to engineer an elusive “soft landing” and avoid tipping the economy into recession.
Fed officials typically stick to generalities and indices, leaving the markets to interpret their exact meaning, but in an unusually blunt speech on Thursday, Fed Board Member Christopher Waller said that there could be a “strong case” for a half point increase in the benchmark loan. rate on the first hike next month, double the usual hike.
However, the situation in Ukraine may change his thinking ahead of the March 15-16 Federal Open Markets Committee meeting.
“Front-loading [a half-point increase] would help convey the committee’s resolve to tackle high inflation,” he said. “Of course, it is possible that the state of the world will be different following the Ukraine attack, and that may mean that a more modest tightening is appropriate, but that remains to be seen.”
Goshen said part of that “tough talk” is to convince markets that the Fed is serious and start moving market rates and calming inflationary pressures without being too aggressive.
“Ideally, they would achieve their goals without having to slow down the economy too much,” she added.
The central bank said it would allow inflation to stay above 2% for some time, but Goldman Sachs Group commodities analyst Jeffrey Currie said “any disruption in the flow of commodities from Russia and Ukraine could raise fears of an overshoot in US inflation and a difficult subsequent crisis.” landing.”
Markets should pay close attention to Fed Chairman Jerome Powell, who is due to present his semi-annual testimony to the US Congress on Wednesday and Thursday.
Oxford Economics chief financial markets officer Kathy Bostjancic said the Ukraine crisis has changed her perspective, and she now expects the Fed to opt for a “more conservative” rate hike of a month. quarter point, even as inflation continues to accelerate.
However, she added that she “closely monitors wage growth, unit labor costs and the pricing power of companies, as they play a critical role in determining the magnitude and how fast inflation will slow later this year”.
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