Hiking events

Ukraine crisis may slow, but not stop, Fed increases

Band Howard Schneider

WASHINGTON, February 24 (Reuters)The US Federal Reserve’s battle with inflation, already complicated by the unpredictable impact of a once-a-century pandemic, now faces a likely energy price shock and a another layer of uncertainty following Russia’s military intervention in Ukraine.

Oil prices soared overnight, with U.S. crude oil futures topping $100 a barrel for the first time since 2014, and stock prices fell around 2% at the start of trading in the USA. .NOT

Investors all but ruled out a larger half-percentage-point rate hike at the Fed’s March meeting, with CME Group’s widely-watched FedWatch tool at one point signaling that the likelihood of a hike as important had been reduced from two-thirds overnight to less than 10%. A quarter-point hike is still expected as the Fed begins raising its target policy rate from the near-zero level set at the start of the pandemic.

Richmond Federal Reserve Chairman Thomas Barkin said on Thursday that U.S. interest rates are likely to rise as “underlying demand is strong. The labor market is tight. Inflation is high and widening “.

Despite events in Ukraine, “I don’t think you’re going to see much change in the underlying logic… But this is uncharted territory, so we’ll have to see where the world goes.”

Fed officials were beginning to think through the implications even before the attack. Atlanta Fed President Raphael Bostic said his staff had begun analyzing the potential impact, particularly any potential hit to business investment if global conditions worsen.

Hours before the invasion was reported, San Francisco Fed President Mary Daly said that with U.S. inflation so high and a strong labor market, the Fed should continue with rate hikes even with the uncertainty of a conflict between Ukraine and Russia. “I really don’t see, unless things get materially worse…that it has any effect” on the Fed’s decision to start raising rates in March, she said at an event Wednesday in Los Angeles.

But officials can now exercise more caution until the scale of Russia’s actions and how they affect oil prices, financial markets and the wider economy become clearer.

“We think we’ve probably reached a tipping point now where this could start to have some impacts on confidence…we know it’s affecting financial markets,” said Jennifer McKeown, head of global economics. at Capital Economics.

It is unlikely to derail the tightening plans, but “central banks are probably more likely to start erring on the side of caution and worry about negative effects on their economy.”

The response of the United States and Europe to Russia’s actions will also be taken into account, adding to what could, on the net, inflict central banks with the worst of both worlds in the form of even higher inflation and slower growth. Indeed, the immediate economic risk appears greater for Europe than for the United States, with European Central Bank policymakers meeting on Thursday in a previously scheduled “informal” meeting that could become a crisis meeting.

Yet the crisis threatens to delay the resolution of key factors that have fueled inflation in the United States, such as global supply bottlenecks, which could keep price pressures high while undermining growth prospects.

Beyond the very short term, “The impact of the stagflationary shock is ambiguous and could be distinctly hawkish,” wrote analysts at ISI Evercore. “The two negative sides of the macroeconomic distribution increase: the right tail risks continued excessive inflation in the medium term and the left tail risks that efforts to rein in that inflation…eventually cause a recession.”

“Against the backdrop of significant disruptions to energy supply chains and prices already, this…will complicate the policy response from central banks,” the TD Securities analysts wrote. “The Fed and the US could be far enough apart to continue to rise as expected, although the risks are moving in 25 (basis point) increments rather than something more aggressive.

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(Reporting by Howard Schneider; Additional reporting by Lindsay Dunsmuir and Ann Saphir; Editing by Dan Burns and Andrea Ricci)

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