- While inflation was the biggest challenge to the U.S. economy just six months ago, a Russian invasion of Ukraine, especially one as extensive as is occurring now, was less contemplated.
- Higher inflation, lower economic growth and greater uncertainty are all conspiring to make things particularly challenging for the Fed’s policymakers, who had until now been set on a hawkish pivot.
Perhaps it was prescient but U.S. Federal Reserve Chairman Jerome Powell’s “nimbleness” doctrine of monetary policy may be exactly what the U.S. and the global economy need at the moment.
While inflation was the biggest challenge to the U.S. economy just six months ago, a Russian invasion of Ukraine, especially one as extensive as is occurring now, was less contemplated.
Wall Street’s money managers are scrambling to figure out how exactly the geopolitical fallout will hit all manner of cross-asset trades in the weeks to come and the current information vacuum will likely lead to more volatility.
With the U.S. Federal Reserve set to meet just weeks from now and raise rates more or less in line with expectations, there is yet the outside chance that it may adopt a more dovish stance to cater for the fact that waning consumer confidence and geopolitical instability could lead to a slowdown in the economy.
Higher inflation, lower economic growth and greater uncertainty are all conspiring to make things particularly challenging for the Fed’s policymakers, who had until now been set on a hawkish pivot.
Yet Western sanctions and the prospect that Putin will not stop at Ukraine, but pivot to other former-Soviet states could embroil the entire European continent in a far more widespread conflict would be enough for policymakers to want to continue baking in flexibility to their policy.
The risks of recession in Europe have increased and Powell has long held the view (rightly) that monetary policy is a blunt tool to cater to inflationary price pressures.
Instead, it’s entirely possible that Powell and his colleagues will inch up rates, perhaps as low as 25 basis points, while the Biden administration works to bring Iranian oil supply and strategic reserves online to put a lid on energy prices that could contribute to inflation.
