Federal Reserve Chairman Jerome Powell testifies before the Senate Banking Committee’s oversight of the CARES Act at the Senate office building on Tuesday, November 30, 2021 in Washington, DC.
Kent Nishimura | Los Angeles Times | Getty Images
The prospect of raising the Federal Reserve rate after March may become less clear if Russia continues to invade Ukraine.
This is because tensions have pushed up oil and gasoline prices, which is a major purchase for many Americans, and it is the American consumer who controls about 70% of the U.S. economy.
Due to this, prices for oil and other goods are rising Movement of Russian troops to Ukraine and US sanctions and allies could potentially lead to limited supplies. Russia is a major exporter of oil and natural gas. The country too the largest exporter of wheat and palladium. Moscow is also a major player in nickel, aluminum and other metals.
“It’s really about oil, not wheat, palladium and nickel,” said Mark Zandi, chief economist at Moody’s Analytics. “Oil has probably risen by $ 10 or $ 15 a barrel due to the conflict … It will probably add, if saved, about 30 or 40 cents a gallon to unleaded. That’s half a percentage point over the same period last year. consumer inflation, and we are already at 7.5%. I feel this is really complicating the Fed’s efforts to curb inflation and return to full employment. “
On Tuesday, U.S. consumers paid an average of $ 3.53 per gallon of unleaded gasoline, up 90 cents from a year ago and up 21 cents last month. according to AAA. Crude oil rose about 50% last year.
Economists said the price of oil could eventually drive Fed policy. The jump in oil prices is initially a catalyst for inflation, and it could eventually become disinflationary if prices rise and persist, slowing economic growth. Indeed, if Russia launches a full-scale military invasion of Ukraine, prices could rise much higher, energy analysts say.
“It’s making it more and more difficult,” said Bruce Cassman, chief economist at JPMorgan. “There is a scenario where the blow to growth is starting to become more significant. There are also scenarios where rising prices are not so detrimental to growth and fuel inflation.”
Cassman expects the Fed to continue raising the Fed rate by a quarter of a point in March, while the situation in Ukraine will weaken an argument for a half-point increase. His forecast is six more rate hikes for the rest of the year.
This is where the central bank’s outlook becomes bleak: on the one hand, growth fears may slow growth. On the other hand, economists believe the Fed could become even more aggressive if it sees a sharper rise in inflation.
“I, of course, think that oil today is about 30% compared to the average for the fourth quarter,” said Kasman. “If you go up 75%, 100%, it will go up to $ 120-150 [per barrel]then I have to believe that there is enough damage here to have a negative impact on global growth. “
Zandi said the Fed is currently focused on curbing inflation, which is much hotter and more resilient than expected. He described the jump in oil prices to $ 150 as a less likely and indicative “dark scenario”, but rising fuel prices may still attract the attention of the Fed.
“I think it strengthens their instinct for rapid policy normalization because they’re more focused on the impact of inflation than on the effects of growth,” Zandi said. “The pandemic was a more shocking supply shock and another shock to oil prices. We have two major supply shocks going on at the same time. That’s why it’s so difficult for the Fed.”
Cassman said the Fed would not prevent it from starting a rate-raising cycle in March because it believes it is behind the curve. “Where we are in three or four months, it will be really important whether we see rising prices and their impact on growth,” he said. He expects that the growth of gross domestic product this year will average 3.6 percent.
Cassman also notes that the Fed is not used to raising rates during a period when oil prices are moving higher.
“It definitely adds pressure. To the extent that growth doesn’t hurt, the highest inflation itself becomes a more average problem,” he said. “On the other side of the coin, the fact that the Fed is tightening and we get a negative supply shock, it increases the negative impact of the supply shock on growth when the Fed tightens it. We haven’t seen it mostly since Paul Walker.”
The former Fed chairman was famous for his aggressive fight against inflation, raising the Fed’s target rate to a peak of 20% in 1981. Conversely, the Fed, led by Chairman Jerome Powell, is going to raise interest rates from the current range of zero to 0.25%.
“In terms of the function of the Fed’s response, Greenspan, Bernanke, Ellen, when they saw oil prices rise sharply, either it happened after they tightened up, or it kept them from gaining strength,” Kasman said.
Zandi said energy accounts for 4.3% of consumer spending. As of December 2021, 2.7% of consumer spending was on motor fuel.
Consumer energy spending peaked at about 10% back in the Walker era in June 1981. The lowest figure was in November 2020, when energy costs fell to 3.3%.