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The Russia-Ukraine conflict is not expected to deter the Federal Reserve from its intended interest rate hike in March. The military invasion will likely boost the increase of oil and gas prices amid Covid-generated inflation that peaked at 7% in February.

No Way Back

According to The New York Times, the Ukraine invasion will do little to keep the Fed from increasing interest rates next month, as inflation in the U.S. breaks away and is bound to skyrocket on swelling oil and gas prices. U.S. and European economic sanctions on Russia are bound to draw a commodities response from the Eurasian giant. The invasion spawns a double 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.” While the situation is unpredictable, central bank officials remain on course to hike interest rates, which will keep debt in check and release the current pressure in the economy.

Growing Uncertainty

Mary C. Daly, president of the Federal Reserve Bank of San Francisco, said Wednesday: “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.” According to Daly, to date, there is no reason for the Fed to slow down on its interest rate hike plan. Evercore ISI’s Krishna Guha said in a note on Thursday that “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.” The political effect of the invasion and the ensuing soaring energy prices “will complicate the ability of central banks on both sides of the Atlantic to engineer a soft landing from the pandemic inflation surge.”

Economic Impact

Experts agree that channeling the economy into a recovery path while avoiding recession is bound to become a more difficult task under increasing prices —the considerable readjustment of monetary policies amid the conflict will also be a barrier. While previous Fed responses to global unrest have involved deflating interest rates to make money more accessible, the present situation poses a different challenge. In an analysis note, Goldman Sachs asserted that “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.”