Federal Reserve officials are turning a wary eye to Russia’s invasion of Ukraine, though several have signaled in recent days that geopolitical tensions are unlikely to keep them from pulling back their support for the U.S. economy at a time when the job market is booming and prices are climbing rapidly.
Stock indexes are swooning and the price of key commodities — including oil and gas — have risen sharply and could continue to rise as Russia, a major producer, responds to American and European sanctions.
That makes the invasion a complicated risk for the Fed: On one hand, its fallout is likely to further push up price inflation, which is already running at its fastest pace in 40 years. On the other, it could weigh on growth if stock prices continue to plummet and nervous consumers in Europe and the United States pull back from spending.
The magnitude of the potential economic hit is far from certain, and for now, central bank officials have signaled that they will remain on track to raise interest rates starting next month, a policy move that will make borrowing money more expensive and cool down the economy.
“I see the geopolitical situation, unless it would deteriorate substantially, as part of the larger uncertainty that we face in the United States and our U.S. economy,” Mary C. Daly, president of the Federal Reserve Bank of San Francisco, said Wednesday at an event hosted by the Los Angeles World Affairs Council. “We’ll have to navigate that as we go forward.”
Ms. Daly said that she did not “see anything right now” that would disrupt the Fed’s plan to lift interest rates.
Raphael Bostic, the president of the Federal Reserve Bank of Atlanta, said during an event on Tuesday that the situation in Ukraine represented a “downward risk” to growth, but suggested he still supported withdrawing some of the Fed’s help from the economy.
But some analysts are warning that the fallout of the conflict could be meaningful,
“Normally geopolitical crises ultimately turn out to be a fade for financial markets and a buying opportunity for investors willing to look past the headlines,” Krishna Guha at Evercore ISI wrote in a research note Thursday morning. “We are very wary of taking that line today.”
Mr. Guha noted that the invasion could disrupt the post-Cold War world order and warned that the jump in energy prices and fallout from sanctions “will complicate the ability of central banks on both sides of the Atlantic to engineer a soft landing from the pandemic inflation surge.”
Economists have been warning that a “soft landing” — in which central banks guide the economy onto a sustainable path without causing a recession — might be difficult to achieve at a time when prices have taken off and monetary policies across much of Europe and North America may need to readjust substantially.
In the past, the Fed has sometimes reacted to global problems by cutting borrowing costs, making money cheaper and easier to obtain, rather than by lifting interest rates and making credit conditions tighter. But economists said this time could be different.
Russia’s Attack on Ukraine and the Global Economy
A rising concern. Russia’s attack on Ukraine could cause dizzying spikes in prices for energy and food and could spook investors. The economic damage from supply disruptions and economic sanctions would be severe in some countries and industries and unnoticed in others.
“The current situation is different from past episodes when geopolitical events led the Fed to delay tightening or ease because inflation risk has created a stronger and more urgent reason for the Fed to tighten today,” researchers at Goldman Sachs pointed out in an analysis note.
Plus, with wages rising and consumers increasingly expecting high inflation in the coming years, the fact that the conflict has the potential to further elevate prices could strike the central bank as problematic.
“Further increases in commodity prices might be more worrisome than usual,” they wrote.
Economists have released varying estimates of how much an oil price shock could bolster inflation.
If oil increases to $120 per barrel by the end of February, past the $95 mark it hovered around last week, inflation as measured by the Consumer Price Index could climb close to 9 percent in the next couple of months, instead of a projected peak of a little below 8 percent, said Alan Detmeister, an economist at UBS who formerly led the prices and wages section at the Fed.
The Goldman researchers said that a $10 per barrel increase in the price of oil boosts U.S. headline inflation by about a fifth of a percentage point, and lowers gross domestic product growth by just under 0.1 percentage point.
“The growth hit could be somewhat larger if geopolitical risk tightens financial conditions materially and increases uncertainty for businesses,” they wrote.
