Ukraine crisis may slow but not stop, Fed rate hike

The Fed’s battle against inflation, already complicated by the unpredictable impact of the pandemic, now faces a likely shock to energy prices and another layer of uncertainty following Russia’s military attack on Ukraine.

Oil prices soared, with U.S. crude oil futures hitting $100 a barrel for the first time since 2014, while stock prices tumbled sharply in the U.S. trading session.

Investors all but ruled out a 0.5 percentage point hike — higher than usual — in interest rates at the US central bank’s March meeting.

CME Group’s widely followed FedWatch tool even signaled the likelihood of a rise of such magnitude being reduced to less than 10%. A 0.25 point hike is still expected, with the Fed expected to start raising its interest rate from the current near-zero level set at the start of the pandemic.

Richmond Fed President Thomas Barkin said on Thursday that US interest rates are likely to rise because “implied demand is strong. The job market is tight. Inflation is high and expanding.” .

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

US central bank officials began to think about the consequences even before the Russian attack. Atlanta Fed President Raphael Bostic said his team had begun analyzing potential impacts, particularly any potential hit to business investment, if global conditions worsen.

Just hours before the break-in was reported, San Francisco Fed Chair Mary Daly said that with U.S. inflation so high and the job market strong, the central bank should continue with interest rate hikes even with the uncertainty of a conflict between Ukraine and Russia.

“I really don’t see, unless things get materially worse … that this will have an effect” on the Fed’s decision to start raising rates in March, she said at an event Wednesday in Los Angeles.

But officials may now be a little more careful until the breadth of Russia’s actions and how they affect oil prices, financial markets and the wider economy become clearer.

How the US and Europe respond to Russia’s actions will also have consequences, which would add to what could cause central banks the worst of both worlds: even higher inflation and slower growth.

Indeed, the immediate economic risk appears greater for Europe than for the US. Monetary policy makers at the European Central Bank have a previously scheduled “informal” meeting on Thursday that could turn into a crisis management meeting.

Still, the crisis threatens to delay resolution of prominent factors that have boosted US inflation, such as global supply bottlenecks, which can keep price pressures high while dampening growth prospects.