With the crisis in Ukraine raising macroeconomic uncertainties around the globe, amid rising prices of oil and agricultural products, the ball is in the global central banks’ court on the course they will take in terms of tightening the monetary policy. The expectations of aggressive policy tightening by central banks, with economists earlier predicting a 50 basis points hike by the US Fed, have now been simmered down. Economists at brokerages such as ING Group, Oxford Economics, TD Securities and Aditya Birla Group now see a 25 basis points hike this month – i.e., a less aggressive approach from the US Fed on policy tightening.
What to expect from US Fed in March meeting regarding the pace of tightening
Analysts expect an upcoming speech from Federal Reserve Chair Jerome Powell in the Senate this week to set the tone. Powell is expected to keep a cautious tone but at the same time brace the markets for a series of interest rate increases, considering high inflation in the United States which is expected to rise further in the medium-term.
Cleveland Fed President Loretta Mester said last week she expects the unfolding situation in Ukraine to be a “consideration in determining the appropriate pace” for raising interest rates in medium terms, according to a Reuters report. While Richmond Fed President Thomas Barkin said the case for US rate increases remained ‘robust’, but also called the invasion an ‘unsettling’ event that would force policymakers to think through what might happen, the report added.
Russia-Ukraine crisis implication: US Fed may turn from hawkish to cautious
The geopolitical fallout from Russia’s military attack on Ukraine will likely keep market volatility high and this will also be reflected in the commentary from Powell, ING Group said. “Powell will continue to suggest we should be braced for a series of interest rate increases given the economy is performing well, is creating jobs in significant numbers, and is experiencing broad-based inflation pressures,” according to the ING report published last week.
“His hawkish commentary following the January Federal Open Market Committee (FOMC) meeting resulted in market interest rate hike expectations jumping higher with a strong chance of a 50bp interest rate increase priced in by financial markets. We suspect he will be more cautious next week given the financial market nervousness and this will likely cement expectations for a 25bp rate increase on 16 March,” the report added.
Rising commodity and energy prices a cause of concern
Powell will also suggest rate hikes citing the economy which is performing well, creating jobs in significant numbers, and is experiencing broad-based inflation pressures, Aditya Birla Group said in a report. “Indeed, the spike in commodity prices makes it even more likely that we will see headline US inflation touch 8% in the next couple of months,” it added. Oil prices reached the highest level since 2014 spiking above $105 a barrel mark. Alongside oil, commodities such as metals, wheat, barley, palladium, have been seeing price rise, which is expected to go up further. Russia is the second largest exporter of oil, while Ukraine and Russia are top producers of commodities and agricultural goods.
High energy prices to tie US Fed’s hands in raising rates
“In the context of the sizeable disruptions to supply chains and energy prices already, this will…complicate the policy response of central banks,” analysts at TD Securities said, according to a Reuters report. “The Fed and the US may be removed enough to keep hiking as planned, though risks shift in terms of 25 (basis point) increments rather than anything more aggressive.”
Some analysts expect Fed action to be weighed more on oil’s trajectory. “It’s really about oil rather than the other, wheat, palladium and nickel,” Mark Zandi, chief economist at Moody’s Analytics, told CNBC. “Oil is probably up $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, and we’re already at 7.5%. My sense is it really complicates the Fed’s efforts to rein in inflation and get back to full employment,” Zandi said.
