Mon, Feb 28, 2022 page11

• Ukraine war complicates US Fed’s inflation curbs

  • AFP, WASHINGTON
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  The uncertainty created by Russia’s invasion of Ukraine and its effects on the global economy is piling more complexity onto the US central bank’s tough fight to contain rising prices.

  Soaring energy and food costs have pushed inflation in the world’s largest economy to its highest pace in four decades, and the US Federal Reserve is poised to next month raise its benchmark borrowing rate to put out the fire.

  However, while the Russia-Ukraine conflict is driving oil prices even higher, it also threatens to undercut an economic recovery from the COVID-19 pandemic.

  

  Vehicles drive past the US Federal Reserve building in Washington on Jan. 25.

  Photo: AFP

  “It just makes a time that was always going to be challenging all the more so,” former Fed vice president Erica Goshen said.

  Fed policymakers are likely “watching the data very carefully. It throws a few more considerations into the pot,” said Goshen, a senior economics adviser at Cornell University’s School of Industrial and Labor Relations.

  Crude prices briefly topped US$100 per barrel on Thursday, after Russia launched its invasion, the first time it passed that benchmark since 2014.

  Wheat prices could also spike, as Ukraine is one of the top global exporters of the grain.

  The US economy expanded 7 percent last year, but the Fed’s preferred inflation index surged to 6.1 percent in the year ending last month, far above the 2 percent target.

  To contain the wave of price increases in energy, housing, vehicles and food, Fed officials have for weeks been preparing financial markets for potential rate hikes, hoping to engineer an elusive “soft landing” and avoid tipping the economy into recession.

  Fed officials typically stick to generalities and hints, leaving markets to interpret their exact meaning, but in an unusually direct speech on Thursday, Fed board member Christopher Waller said there could be a “strong case” for a half-point increase in the benchmark lending rate in the first hike next month, twice the usual increase.

  However, the situation in Ukraine could change his thinking before the meeting of the US Federal Open Markets Committee on March 15 and 16.

  “Front-loading [a half-point increase] would help convey the committee’s determination to address high inflation,” he said. “Of course, it is possible that the state of the world will be different in the wake of the Ukraine attack, and that may mean that a more modest tightening is appropriate, but that remains to be seen.”

  Goshen said that some of this “tough talk” was to convince markets that the Fed is serious, and to begin to move market rates and cool inflation pressures without being overly aggressive.

  “Ideally, they would achieve their goals without actually having to slow the economy down too much,” she added.

  The central bank has said it would allow inflation to remain above 2 percent for some time, but Goldman Sachs Group commodities analyst Jeffrey Currie said that “any disruption to commodity flows from Russia and Ukraine could raise concerns of a US inflation overshoot and a subsequent hard landing.”

  Markets are expected to pay close attention to Fed Chair Jerome Powell, who is scheduled to present his semiannual testimony to the US Congress on Wednesday and Thursday.

  Oxford Economics financial markets head Kathy Bostjancic said that the Ukraine crisis has changed her view, and she now expects the Fed to opt for a “more conservative” quarter-point rate hike, even as inflation continues to accelerate.

  However, she added that she is “closely watching wage growth, unit labor costs and corporate pricing power, since they play a critical role in determining the extent and speed by which inflation will slow later this year.”
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