Ukraine invasion not expected to thwart U.S. interest rate hikes but could minimize them

Will Vladimir Putin knock Federal Reserve Chair Jerome Powell off his game? Doubtful.

While not a surprise, Russia’s invasion of Ukraine is not one of the data points the Federal Reserve has been regularly monitoring. That’s not to say the Fed is immune to geopolitical problems, when it considers its strategies to influence the American economy. It isn’t. However, the Fed is locked in its own battle against inflation, which the attacks threaten to make worse.

For weeks, Federal Reserve leaders have signaled they would be ready to raise their shortterm target interest rate for the first time since before the pandemic started in March 2020. It is the Fed’s biggest tool in hopes of cooling high inflation. The lingering question for investors has been, “By how much?”

If Fed officials are to guide investor expectations ahead of their mid-March meeting, they will have to do it in the week ahead.

The agency has a blackout policy in the days leading to its interest rate-setting meetings. With the next meeting scheduled for Mar. 15-16, Federal Reserve governors and regional bank presidents have until Friday to publicly shape expectations.

Don’t expect any significant modification for an interest rate hike later in the month. Still, the Fed will keep its options open. The unfolding war that Russia has started could influence the pace and frequency of rate hikes this year, but it is unlikely to deter the central bank from a small, but important rate hike in March.

That’s because inflation is the fight the Fed is engaged in now. And Putin’s invasion is inflationary. Crude oil hit a six-year high after Russia’s military began launching missiles early Thursday and marching across Ukraine’s border. Even if American drivers don’t put gasoline from Russian oil into their tanks, it is a global market for crude oil.

The Fed isn’t blind to the threat posed to economic growth by the Russian attacks. Yet, the invasion is unlikely to deter the central bank from its immediate path.

Tom Hudson hosts ‘The Sunshine Economy’ on WLRN-FM, where he is the vice president of news. Twitter: @HudsonsView