Fed officials point to interest rate hike in March despite Ukraine

Federal Reserve officials have signaled that they are on track to raise interest rates next month, despite the uncertainty that Russia’s invasion of Ukraine has brought to the global economy.

While acknowledging the risks posed by the conflict that triggered one of the worst security crises in Europe since World War II and caused oil prices to rise, US central bankers have stressed the need to face the hottest US inflation in the past 40 years.

“By preventing an unexpected turn in the economy, I believe it would be appropriate to push the funds rate up in March and follow up with further increases in the coming months,” Cleveland Fed Chairman Loretta Mester said at an event hosted by Lyons Companies and the University of Delaware on Thursday. said.

“The effects of the situation in Ukraine on the medium-term economic outlook in the US will also be taken into account in determining the appropriate pace at which stimulus will be removed.”

While Fed officials prior to the Russian invasion signaled their readiness to raise interest rates when they met to face inflation on March 15-16, they had kept their options open on how far or how fast they moved after takeoff.

Mester was among five US central bankers scheduled to speak publicly on Thursday, echoing the sentiment of Raphael Bostic of Atlanta, who said he still expects to raise rates in March, provided the economy now develops as he expects.

“If the numbers come close to that, I think we can continue with our rate hike plan,” he said during the Atlanta Fed’s Banking Outlook Conference. said. “We’ll have to see where things go. I know we’ve seen oil prices rise dramatically over the past few weeks, as have natural gas. It may fluctuate.”

Traders and economists still see the possibility of the Fed starting rate hikes in March, even as geopolitical risks make a half-point increase less likely. Interest rate futures show that more than a quarter point increase is expected next month.

Goldman Sachs Group Inc. “The current situation is different from past events where geopolitical events have prompted the Fed to delay or ease tightening, because the risk of inflation is stronger today than it was in the past, and creates an immediate cause of tightening,” economists Joseph Briggs and David Mericle wrote in a client note.

Rising energy costs could push headline inflation even higher, but the Fed often looks at what they mean for household spending – the higher oil price often lowers purchasing power, reducing demand.

Shock of the 1970s

However, the lessons to be learned from the oil shock of the 1970s that kept inflation high for a long time are also likely to affect policy makers grappling with high inflation.

“Although geopolitical events put some downside risk to the near-term growth forecast, they add upside risk to the inflation forecast,” Mester said. The final pace at which monetary policy supports are removed will need to be data-driven and forward-looking,” he said.

Earlier on Thursday, Richmond Fed chairman Thomas Barkin said “time will tell” whether Ukraine has changed its monetary policy outlook, confirming the trend to start normalizing policy in response to price pressures.

Barkin said the US’s links to the Russian economy and US banks’ risk to Russia appear limited, but officials will examine the impact on the energy and commodity markets for possible impacts on the US. He also noted that the economic fallout was limited when Russia annexed Crimea in 2014.

“So if this develops like 2014, I don’t think we’re going to see much change in the underlying logic that I’m talking about. But this is unexplored territory. So we’ll have to see where the world is going.”

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