Fed tightening plans now contending with war, possible oil shock

REUTERS: U.S. Federal Reserve officials have begun taking stock of how the unfolding conflict in Ukraine might influence the economy and their planned shift to tighter monetary policy, with investors and some officials suggesting it could slow but likely not stop a planned round of interest rate increases.

Oil and commodity price shocks and a possible blow to global growth and confidence were clear risks, analysts said, and one Fed policymaker said the events of the last 24 hours could weigh on upcoming Fed decisions. “The implications of the unfolding situation in Ukraine for the medium-run economic outlook in the U.S. will also be a consideration in determining the appropriate pace” for raising interest rates, 

said Cleveland Fed President Loretta Mester. Richmond Fed President Thomas Barkin said the case for U.S. rate increases remained “robust,” but also called the invasion an “unsettling” event that would force policymakers to think through what might happen. The risks could be as obvious as high oil prices weighing on consumer spending and raising inflation even further, or as unknowable as how Russia might respond to U.S. sanctions. “Underlying demand is strong. The labour market is tight. Inflation is high and broadening,” Barkin said, describing the basic case for rate increases. “But I will say that it is unsettling to hear the news. As always happens you have to start and think through where could this thing go that you might not have forecast originally.”

The Fed plans to raise interest rates beginning in March as it battles inflation that has hit multi-decade highs.
Fed policy has already been complicated by the unpredictable impact of a once-in-a-century pandemic, and must now account for a likely energy price shock and other uncertainty following Russia’s military move into Ukraine. 
Oil prices spiked overnight, with U.S. crude oil futures topping US$ 100 a barrel for the first time since 2014, and stock prices slid by more than 1 percent in midday U.S. trading.  Investors have now all but ruled out a larger half-percentage-point rate increase at the Fed’s March meeting. CME Group’s widely followed FedWatch tool was signaling at one point that the probability of a hike that large had fallen overnight from about 33 percent to less than 10 percent.