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US Federal Reserve officials stuck to their resolve to raise interest rates next month despite the uncertainty posed by Russia’s invasion of Ukraine, with at least one policymaker considering a half-point move.
While acknowledging the risks created by the conflict, which has triggered one of the worst security crises in Europe since the Second World War and caused oil prices to jump, US central bankers stressed the need to confront the hottest bout of US inflation in 40 years.
“With the economy at full employment and inflation far above target, we should signal that we are moving back to neutral at a fast pace,” governor Christopher Waller said on Thursday, in remarks made at an event at the University of California.
“A 50-basis point hike would help do that” if data on jobs and prices stay hot in coming weeks, he said.
Before the Russian invasion, Fed officials had vigorously signalled their readiness to raise interest rates when they meet on March 15 and 16 to confront inflation, while keeping their options open on how far or how fast they will move following lift-off.
The debate is putting focus on several key moments over the next two weeks: January figures on the Fed’s preferred inflation gauge, which are due Friday; chairman Jerome Powell’s semi-annual monetary-policy statement to Congress on March 2 and 3; the February employment report on March 4; and February data on the consumer price index, due on March 10.
Mr Waller, who favoured raising rates by 100 basis points by the middle of the year and shrinking the Fed’s bloated balance sheet by its July meeting, said it was “too soon to know how Russia’s attack on Ukraine will affect the US economy, and it may not be much easier by the time of our March meeting”.
Traders and economists still see the Fed adopting rate increases in March. Interest-rate futures show a quarter-point increase next month is more than fully priced in.
Cleveland Fed chief Loretta Mester earlier on Thursday said that the “implications of the unfolding situation in Ukraine for the medium-run economic outlook in the US will also be a consideration in determining the appropriate pace at which to remove accommodation”.
Increasing energy costs could push headline inflation even higher, although the Fed typically also takes into account what that means for household spending. Higher oil prices hitting Americans in the pocketbook could dampen demand.
But lessons from the 1970s oil shock are expected to also weigh on policymakers grappling with high inflation that they worry could become entrenched, and that concern is expected to dominate.
“Geopolitical events add upside risk to the inflation forecast even as they put some downside risk to the near-term growth forecast,” Ms Mester said. “The ultimate pace at which monetary policy accommodation is removed will need to be data driven and forward looking.”
governor, Federal Reserve
Atlanta Fed president Raphael Bostic said on Thursday that he still expects to raise rates in March, provided the economy evolves as he anticipates.
“If the numbers come in close to that, I think that we can continue with our lift-off plan,” he said during the Atlanta Fed’s Banking Outlook Conference.
“We will just have to see where things go. I know we have seen over the past several weeks that oil prices have increased dramatically, as have natural gas [prices]. That could have ripples.”
Also on Thursday, Richmond Fed chief Thomas Barkin said that “time will tell” whether Ukraine changes the outlook for policy, while affirming his inclination to start normalising policy to counter price pressures.
Mr Barkin said that US links to the Russian economy and the exposure of US banks to the country appear to be limited, although officials would examine the impact on energy and commodity markets for potential spillovers to the US.
He also noted that when Russia annexed the Crimea in 2014. the fallout had been limited.
