While it appears unlikely that Federal Reserve officials would be shaken by the conflict with Ukraine, they are likely to continue to support the economy at this time. However, the rapid rise in tension will draw the attention of policymakers and could cause even more inflation in the near future.
The central bank has two jobs — fostering full employment and stable prices — and it has been preparing to raise interest rates and make other policy adjustments too cool down the economy as inflation runs at its fastest pace in 40 years.
Oil and gas prices have risen already during the conflict and could rise further, leading to a higher peak of headline inflation (which includes prices at the pump). Due to the volatility in fuel costs, the Fed does not normally react to fluctuations in oil prices when setting its policy. However, this disruption could make it more difficult for consumers to keep up with inflation trends.
“The Federal Reserve pays very close attention to geopolitical events, and this one of course in particular as it’s the most prominent at this point,” Michelle Bowman, a Fed governor, said on Monday.
Ms. Bowman noted that the U.S. has minor banking, financial, and trade interests with Russia, and that “we don’t believe that would have a significant impact” on the economy given the small size of those relationships.
“But we do recognize that there are significant opportunities for potential impacts on the energy markets, as we’re moving forward, if things were to deteriorate,” Ms. Bowman agreed. “Obviously we’ll continue to watch that, and if we believe that might have some influence on the global economy, we’ll take that into account as we’re going into our meetings and discussing the economy more broadly.”
As families spend more of their monthly income on energy, high fuel prices could impact consumer spending on other goods. It could also affect demand if consumers are uncertain about the future or stock prices fall, which could lead to a reduction in sales.
Central bankers noted in minutes of their most recent meeting that geopolitical risks “could cause increases in global energy prices or exacerbate global supply shortages,” but also that they were a risk to the outlook for growth.
Officials see it as a risk to many, rather than a central point of concern.
“We actually have seen fighting in this area of the world in the past,” James Bullard, the president of the Federal Reserve Bank of St. Louis, said on CNBC last week. “I do think it’s quite an important foreign policy issue, but I’m not seeing it as a leading macroeconomic issue, at least at this point.”
It is difficult to predict what the conflict between Russia & Ukraine will mean for America’s economy. It is not clear how tensions will escalate or how Russia will respond as Europe and the U.S. prepare sanctions.
Plus, while rising fuel prices could push up inflation, global unease is likely to push the value of the dollar higher as global investors move into what they see as “safe-haven” assets. This could make imported goods more affordable, which is the opposite of rising fuel prices.