The outlook for Federal Reserve rate hikes after March may become less clear if Russia continues its incursion into Ukraine.
That’s because the tensions have pushed up the price of oil and gasoline, a major purchase for many Americans, and it’s the U.S. consumer that drives about 70% of the U.S. economy.
The prices of oil and other commodities have been rising on concerns that Russia’s troop movements into Ukraine and sanctions
Which is from the U.S. and allies could potentially lead to limited supplies. Russia is a major exporter of oil and natural gas.
The country is also the largest exporter of wheat and palladium. Moscow is also a major player in nickel, aluminum, and other metals.
“It’s really about oil rather than the other, wheat, palladium, and nickel,” said Mark Zandi, chief economist at Moody’s Analytics. “Oil is probably up to $10 or $15 a barrel because of the conflict.
That will probably add if sustained, about 30 or 40 cents a gallon to unleaded. That’s as much as a half-percentage point to year-over-year consumer inflation.
My sense is it really complicates the Fed’s efforts to rein in inflation and get back to full employment.”
Consumers across the U.S. were paying an average of $3.53 per gallon of unleaded gasoline Tuesday,
Up to 90 cents from a year ago and 21 cents in the past month, according to AAA. Crude oil is up about 50% in the past year.
Economists said it will be the price of oil that could ultimately drive Fed policy. The jump in oil prices is first a catalyst for inflation.
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And eventually, it could become disinflationary if the price goes higher and endures, dampening economic growth.
Indeed, if Russia launches a full-scale military invasion into Ukraine, prices could go much higher, energy analysts say.
“It makes things more complicated,” said Bruce Kasman, JPMorgan’s chief economist. “There is a scenario where the growth hit starts to get more substantial.
There are also scenarios where the price increases are not as damaging to growth and it’s feeding inflation.”
Kasman expects the Fed will proceed with a quarter-point increase in the fed funds rate in March.
With the Ukraine situation weakening the argument for a half-point hike. His forecast is for six more rate hikes over the balance of the year.
This is where the outlook becomes muddy for the central bank: On the one hand, a growth scare could slow the pace of hiking.
On the other hand, economists say, the Fed may become even more aggressive if it sees a sharper pickup in inflation.
“I certainly think oil today is standing about 30% over its fourth-quarter average,” said Kasman.
“If you move up toward a 75%, 100% increase, which would be moving to $120 to $150 [per barrel], then I have to believe there’s enough damage here to have a negative impact on global growth.”
Zandi said the Fed’s focus currently is on taming inflation, which is much hotter and more 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.
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“I think it reinforces their instinct now to normalize policy quickly because they are focused more on inflationary effects than on the growth effects,” said Zandi.
“The pandemic was a more supply shock and layer on top of it another oil-price shock. We have two serious supply shocks hitting at the same time. That’s why this is so difficult for the Fed.” CNBC!