War in Ukraine and high commodity prices put the Fed in a tough spot, expert says

The war in Ukraine and high commodity prices put the Federal Reserve in a difficult position as these issues affect US economic growth, an expert says.

“The invasion of Russia and the resulting spike in oil and other commodity prices puts the Fed in a difficult position because it will hurt growth but stoke higher inflation,” said Mark Zandi, an economics economist. Head of Moody’s Analytics, Anadolu Agency.

For most of 2021, the Fed ignored rising prices and defined inflation as “transient.” That word, however, was dropped late last year as inflation rose and the central bank signaled it would start raising rates in 2022.

Annual U.S. consumer inflation rose 7.9% in February, marking the biggest 12-month increase since January 1982, according to the U.S. Department of Labor. Producer prices in February rose a record 10% a year, according to department figures.

Brent crude jumped last week to $139.13 a barrel, its highest level since 2008, amid a U.S. ban on imports of Russian oil, natural gas and coal.

Prices of other commodities, such as wheat, palladium, copper, platinum and nickel also climbed last week.

Crude oil and commodity prices began to shed some of those gains this week.

“I think the Fed will stick to the script and raise the fed funds rate by a quarter of a percentage point, and signal that further rate increases are likely in the months ahead,” Zandi said.

Analysts were divided earlier this year on whether the Fed would begin monetary tightening with a 25 or 50 basis point rate hike in March.

But with Russia’s war on Ukraine and US sanctions on Moscow, especially food and energy prices, have risen.

While this will hurt the US economic recovery as it emerges from the coronavirus pandemic, the Fed is unwilling to rattle markets with a 0.5% rate hike.

“I suspect the Fed will need to respond to rising inflation and inflation expectations, and be even more aggressive in normalizing interest rates this year,” Zandi said.

He said Fed Chairman Jerome Powell made it clear in congressional testimony earlier this month that a half-percentage-point hike in the federal funds rate was unlikely during the next central bank meeting, given the uncertainty created by the Russian military operation in Ukraine.

Powell said on March 2 that he was “inclined to propose and support a 25 basis point rate hike” at the March meeting of the Federal Open Market Committee (FOMC).

Zandi said it expects rate increases of at least four quarters of a percentage point this year, but there could also be as many as seven rate increases, of 0.25%, in each of the FOMC meetings through the remainder of 2022.

“I also expect the Fed to start letting its balance sheet shrink by the middle of the year,” the expert noted.

The Fed will conclude its two-day meeting on Wednesday.

In addition to an interest rate decision, the central bank will also release economic projections, which will include estimates of economic growth, unemployment, inflation and interest rates for the end of the year. year and the years to come.

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