Federal Reserve officials are wary of Russia’s invasion of Ukraine, though several have signaled in recent days that geopolitical tensions are unlikely to prevent them from withdrawing support for the U.S. economy at a time when the labor market is booming and prices are climbing rapidly.
Stock indices are slumping and the price of key commodities – including oil and gas – has risen sharply and could rise further as Russia, a major producer, responds to US and EU sanctions.
That makes the invasion a complicated risk for the Fed: on the one hand, its fallout could drive up price inflation even further, which is already at its fastest pace in 40 years. On the other hand, it could weigh on growth if stock prices continue to fall and nervous consumers in Europe and the United States give up spending.
The scale 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 from next month, a political decision that will make borrowing more expensive and chill the economy. .
“I see the geopolitical situation, unless it deteriorates significantly, as part of the broader uncertainty we face in the United States and in our American economy,” Mary C. Daly said Wednesday, President of the Federal Reserve Bank of San Francisco. an event organized by the Los Angeles World Affairs Council. “We’ll have to navigate that as we move forward.”
Ms Daly said she “sees nothing right now” that would disrupt the Fed’s plan to raise interest rates.
Raphael Bostic, the president of the Federal Reserve Bank of Atlanta, said at an event on Tuesday that the situation in Ukraine posed a “downside risk” to growth, but suggested he still supported the withdrawal of part of the Fed’s aid to the economy.
But some analysts warn that the fallout from the conflict could be significant,
“Normally, geopolitical crises eventually prove to be a meltdown for financial markets and a buying opportunity for investors willing to look beyond the headlines,” Evercore ISI’s Krishna Guha wrote in a research note on Thursday. morning. “We are very careful to take this line today.”
Guha noted that the invasion could disrupt the post-Cold War global order and warned that soaring energy prices and the fallout from sanctions “will complicate the ability of central banks on both sides to the Atlantic to organize a soft landing of the pandemic”. inflation surge.
Economists have warned that a “soft landing” – in which central banks guide the economy onto a sustainable path without causing a recession – could be difficult to achieve at a time when prices have taken off and monetary policies in a much of Europe and North America may need to readjust considerably.