Fed to Raise Rates Amid War

As the Russian invasion of Ukraine enters its third week, emotions are running high. Last week saw massive gyrations in the stock and commodity markets. The action was a harbinger of what’s to come in the short term: higher consumer prices, due to a combination of the commodity surge and renewed pressures on the supply chain.

Given that inflation was already smacking us in the face at every turn (the Consumer Price Index (CPI) for February increased by 7.9 percent from a year ago, the fastest pace since January, 1982, and that was before the war began), there is a chance that high prices will start to impact consumers and businesses, who will in turn change their behaviors. Before Ukraine, the anger and concern over the 40-year highs in the rate inflation did not impact consumption. Yes, we griped about it, but that didn’t stop us from unleashing our post-COVID spending sprees.

But as gas prices reach all-time nominal highs, many consumers will be forced to make choices about their limited resources. And there could be an even darker side to the shifts in our reactions to price spikes. Analysts say that inflationary fears can trigger hoarding and demand for higher wages, which can create an inflationary spiral. Even if we don’t start hoarding, higher prices could at least impact the economic growth that was expected for 2022 and at worst could trigger a full-blown recession.

Amid the backdrop of war in Ukraine and Western sanctions on Russia, Federal Reserve officials are trying to lift short-term interest rates from the emergency levels that have been in place for two years. They probably wish that they started the rate hike cycle months ago to quell inflation, but we are where we are and there’s no going back in time. Economist Joel Naroff says that the recent surge in gas prices complicates matters for the central bank. “The Fed has a delicate balancing act that is partly due to its misreading of inflation and the global supply chain issues, as well as the unexpected world events. A policy mistake could lead to a recession, or an extended period of high inflation which would require killing the economy and creating a recession, or even a period of stagflation.” 

Despite the pressure, the central bank will probably increase interest rates by a quarter of a percentage point, the first of what is likely to be a series (4-5) of similar increases this year, and another 4-5 in 2023. The Fed is aiming to land at 2.25-2.5 percent, which was the high point of the last cycle (Dec 2018). Prior to the Russian aggression in Ukraine, most believed that if inflation stayed higher for longer, that the Fed would be willing to tighten more aggressively. But if the price spike occurs due to the Ukraine war, officials may be a little more patient.

UKRAINE RELIEF - GIVING TIPS

If the news cycle is getting you down, it’s time to look beyond yourself and chip in to help with the various Ukrainian relief efforts. The International Red CrossCAREDoctors Without Borders and the International Medical Corps are on the ground assisting in Ukraine and in surrounding countries. You should also check in with your employer to see if they have established a Ukraine relief fund or provide a match to your donation.

It pains me to mention this, but with every tragedy comes some terrible scam. The Federal Trade Commission has already issued a warning about fake charities that look and sound like real ones. The first step is to be defensive: Before you give, slow down and do some research. Don’t assume a request to donate is legitimate because someone posted it on social media. Instead, check out the organization online and search for the name of the group, plus words like “review,” “scam,” or “complaint.” You also should review the non-profit at one of the charity rating organizations like Charity NavigatorCharityWatch, or the BBB Wise Giving Alliance.