Oil and commodity price shocks and a possible blow to global growth and confidence are clear risks, analysts said, and a Fed governor said events over the past 24 hours could affect future central bank decisions.
“The implications of the current situation in Ukraine for the medium-term economic outlook for the United States will also be a consideration in determining the right pace for raising interest rates,” said Cleveland Fed Chair Loretta Mester.
Richmond Fed Chairman Thomas Barkin said he was also looking at how the conflict affects commodity prices and financial markets, but that interest rate hikes remain intact in the United States.
“The basic demand is strong. The labor market is tight. Inflation is high and expanding. Despite the events in Ukraine, I don’t think you will see too many changes in the basic logic … But this is unexplored territory, so it will we need to see where the world is going, “Barkin said.
The Fed plans to raise interest rates starting in March, as it struggles with inflation that has peaked for decades.
Fed policy has already been complicated by the unpredictable impact of the pandemic, and now it must take into account a likely shock to energy prices and other uncertainties as a result of Russia’s military action in Ukraine.
Oil prices rose overnight and oil futures traded above $ 100 a barrel for the first time since 2014, while Wall Street stock prices fell on Thursday.
Investors now ruled out a 0.5 percentage point increase in the benchmark interest rate at the March Fed meeting.
The FedWatch tool, widely watched by CME Group, once reported that the probability of such a large increase had dropped overnight from about 33% to less than 10%. An increase of a quarter of a percentage point is still anticipated.
But the overnight events provided the central bank with an unexpected new impetus, an echo of the oil price shocks of the 1970s, which were also caused by the geopolitical conflict. In that case, there were other tensions in the Middle East and they came at a time when the US economy was much more dependent on imported energy and the industry much less energy efficient.
However, Fed officials have begun to think about the implications of an event that had the potential to both slow down growth and boost inflation.
“We will be following this closely here in Atlanta and in the Federal Reserve system to assess the economic and financial impact,” Atlanta Fed Chairman Raphael Bostic said during a virtual event. However, he said that the Fed’s first-rate issue now is inflation control and that it is ready to raise interest rates by up to four-quarters of a percentage point this year, and depending on how things go, it could be more than that. ”.
Hours before the report of the invasion, San Francisco Fed Chairman Mary Daly said that no matter how high the inflation and the strong labor market, the Fed should continue to raise interest rates, even with the uncertainty of a conflict between Ukraine. and Russia.