Russian invasion impacts European central bankers more than US

US near-term course set but ECB’s life just got even harder

 
Russia’s abhorrent invasion of Ukraine will complicate the lives of central bankers, but European Central Bank President Christine Lagarde will feel the strain more than Federal Reserve Chair Jerome Powell. Higher oil prices will boost inflation, weaken growth prospects and stoke stagflation fears.

The Federal Open Market Committee meets on 15-16 March, a meeting unanimously anticipated to start a process of rate hikes in the US, along with further discussions on how to reduce the Fed’s balance sheet. The latest developments in Russia and Ukraine heighten geopolitical risk and will undoubtedly weigh heavily on the FOMC’s thinking.

Yet, on top of the 25 basis point March rate increase (expectations for a 50 bp hike have diminished), Russia’s invasion is not likely to deter the Fed from continuing to raise rates beyond March given the US’ hot labour markets, high inflation and the perception that the Fed is well behind the curve, as discussed in OMFIF’s recent discussion with former Treasury Secretary Lawrence Summers.

The overall impact of Russia’s actions on the US economy may not be significant, assuming oil prices don’t soar, though that remains a significant risk. Higher oil prices will boost already high headline inflation, a matter which will deeply concern the FOMC. For example, a 20% rise in the price of a barrel could add half to three-quarters of a percentage point to headline inflation. In this regard, a key question is whether energy prices remain around $100 per barrel.

 
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Πηγή: omfif.org