Ukraine war, high commodity prices put Fed in tough spot: Expert

By Ovunc Kutlu

ANKARA (AA) - The war in Ukraine and high commodity prices put the Federal Reserve in a difficult position as those issues affect US economic growth, according to an expert.

"Russia's invasion and the resulting surge in oil and other commodity prices puts the Fed in a tough spot as it will hurt growth but fan higher inflation," Mark Zandi, chief economist at Moody's Analytics, told Anadolu Agency.

Through most of 2021, the Fed ignored the rise in prices and defined inflation as "transitory." That word, however, was dropped late last year as inflation climbed higher and the central bank signaled it would start making rate increases in 2022.

Annual consumer inflation in the US rose 7.9% in February, marking the largest 12-month increase since January 1982, according to the US Labor Department. Producer prices in February were up a record 10% annually, the department's figures showed.

Brent crude jumped last week to $139.13 per barrel, its highest since 2008, amid the US' import ban on Russian oil, natural gas and coal.

Other commodity prices, such as wheat, palladium, copper, platinum and nickel also soared last week.

Crude oil and commodity prices started to lose some of those gains this week.

"I think the Fed will stick to the script and increase the federal funds rate by a quarter percentage point, and signal that more rate increases are likely in coming months," said Zandi.

Analysts were divided earlier this year on whether the Fed would start monetary tightening with a 25 basis or 50 basis points rate hike in March.

But with Russia's war on Ukraine and US sanctions on Moscow, especially food and energy prices, have been on the rise.

While this harms the American economic recovery as it sees daylight from the coronavirus pandemic, the Fed does not want to rattle markets with a 0.5% rate hike.

"I suspect, the Fed will need to respond to the higher inflation and inflation expectations, and be even more aggressive in normalizing interest rates this year," said Zandi.

He said Fed Chair Jerome Powell made it clear in testimony to Congress earlier this month that a half percentage point increase in the federal funds rate is unlikely at the central bank's next meeting, given the uncertainty created by Russia's military operation in Ukraine.

Powell said March 2 that he is "inclined to propose and support a 25 basis point rate hike" during the Federal Open Market Committee's (FOMC) March meeting.

Zandi said he expects at least four quarter percentage point rate increases this year, but there could also be as many as seven rate increases, of 0.25%, at each of the FOMC meetings through the remainder of 2022.

"I also expect the Fed to begin allowing its balance sheet to shrink by mid-year," the expert noted.

The Fed will conclude its two-day meeting Wednesday.

In addition to an interest rate decision, the central bank will also release economic projections, which will include estimates of economic growth, unemployment, inflation and interest rates for year-end and coming years.