If Russia continues its incursion into Ukraine, the outlook for Fed rate hikes may become less clear.
The tensions have pushed up the price of oil and gasoline, a major purchase for many Americans, and it is the U.S. consumer that drives 70% of the U.S. economy.
Concerns that Russia's troop movements into Ukraine and sanctions from the U.S. and allies could lead to limited supplies have caused the price of oil and other commodities to rise. Russia exports oil and natural gas. The country is the largest exporter of wheat. Moscow is a major player in nickel, aluminum and other metals.
Mark Zandi, chief economist at Moody's Analytics, said that oil is more important than other metals. If sustained, that will add about 30 or 40 cents to the price of a gallon of gas. We are already at 7.5% year-over-year consumer inflation, which is as much as a half-percentage point. It complicates the Fed's efforts to rein in inflation and get back to full employment.
The average price for a gallon of gas in the US was $3.53 on Tuesday, up 90 cents from a year ago and 21 cents in the past month, according to the auto club. The price of crude oil has increased in the past year.
The price of oil could affect Fed policy. If the price of oil stays high, it will cause inflation and eventually cause disinflation if it drags on economic growth. Energy analysts say prices could go much higher if Russia launches a full-scale military invasion.
Bruce Kasman, the chief economist at JP Morgan, said that it makes things more complicated. There are also scenarios where the price increases are not as bad for growth.
Line chart with 828 data points.The chart has 1 X axis displaying Time. Range: 2022-01-02 18:00:00 to 2022-02-22 16:00:00.The chart has 1 Y axis displaying values. Range: 75 to 105.End of interactive chart.
Kasman thinks the Fed will raise the fed funds rate by a quarter-point in March and that the Ukraine situation will make a half-point hike less likely. He expects six more rate hikes over the course of the year.
On the other hand, a growth scare could slow the pace of hiking. If inflation picks up, the Fed may become even more aggressive.
The fourth-quarter average for oil is 30% over that of today, according to Kasman.
The Fed's focus is currently on inflation, which is much hotter and enduring than it had expected. He described a jump in oil prices to $150 as less likely and indicative of a dark scenario, but rising fuel prices could still get the Fed's attention.
It reinforces their instinct to change policy quickly because they are focused more on inflationary effects than on the growth effects. There are two shocks hitting at the same time. That is the reason this is difficult for the Fed.
The Fed will not be deterred from beginning its rate hiking cycle in March since it believes it is behind the curve. Gross domestic product is expected to increase by 3.6% this year.
The Fed is not used to raising rates during a time when oil prices are moving higher.
It definitely adds pressure. The higher inflation itself becomes a more medium-term problem if growth isn't hurt. We haven't seen this since Paul Volcker.
The fed funds target rate was raised to 20% in 1981 by the former Fed chairman. The Fed is about to raise interest rates.
When Greenspan, Bernanke, and Yellen saw oil prices move up, they either restrained them from tightening or they did it after they had done so.
Energy products make up 4.3% of consumer spending. The percentage of consumer spending on motor fuels was.
In the Volcker era, consumer energy spending peaked at 10%. Spending on energy fell to 3.3% of total consumer spending in November 2020.
All Rights Reserved © 2024
