Late at night on March 16, the Federal Reserve announced its policy decisions following the second meeting this year. A few weeks before the event, market participants have been trying to puzzle out how much the central bank would raise the official funds rate. The odds were that it would be increased. Nevertheless, let me remind you something from my previous articles. A rate hike by 25 basis points is a very cautious decision under the current economic conditions. Inflation in the US has already skyrocketed to 7.9% in annual terms. There are no signs that it could slacken its pace in the near future. Thus, the higher the Fed will raise interest rates, the more efficient measure it will be to push inflation down. At the same time, the FOMC policymakers have their own reasoning.
An unpredictable factor popped up from nowhere a month ago. The Russia – Ukraine geopolitical crisis is sure to influence the whole world and a national economy in every country with long-lasting repercussions. Last week, Jerome Powell said open that the geopolitical conflict entailed grave risks for the US economy in particular. The same message was sent at the press conference following the policy meeting. For the time being, this fierce standoff has led to a complete overhaul of the global energy market. This overhaul is at the early stage. A lot of countries worldwide express their wish to abandon Russian petroleum suppliers. Notably, the process of replacing exporters cannot be fulfilled at once. Therefore, oil and gas are developing a rapid rally because nearly half of the countries worldwide have joined the embargo on oil and gas imports. It has caused tight supply in the oil and gas market. Hence, the rally in the energy market is a logical consequence.
No doubt, elevated energy prices will by mirrored on consumer inflation in the US and the EU. Indeed, these economies cannot survive without oil and gas. Oil is consumed for home heating, as petrol for vehicles, by production facilities, etc. Therefore, we can predict that inflation is set to accelerate further in the US and the EU. All in all, even though the US Fed would raise interest rates to 1-1.5%, it will not guarantee that inflation will slow down at least by 1%. We guess that soaring inflation will be the headache for central banks for at least several years ahead. A few years ago, the Federal Reserve and the ECB used to employ various tools aiming to spur inflation to the target level of 2%. However, we should understand that the Federal Reserve is aware that it cannot increase interest rates aggressively on the back of the military conflict in Ukraine that might end up in World War III. I mean that the FOMC should take into account the factor of the military hostilities in Europe which poses a grave threat. For the time being, high inflation and counter-measures are taking a back seat for a while.
