The minutes of the Federal Open Market Committee (FOMC) meeting on March 15–16 shed light on the economic impact of the Ukraine war on the U.S. economy, specifically with regard to inflation and the Fed’s interest rate.
Participants in the meeting “judged that the implications of the war for the U.S. economy were highly uncertain, but in the near term, the invasion and related events were likely to create significant additional upward pressure on inflation and could weigh on economic activity,” the minutes said.
Policymakers revised down their GDP growth expectations for 2022 from the earlier December forecasts due to multiple issues like a slowdown in inventory investment, reduced monetary and fiscal policy accommodations, and Russia’s invasion of Ukraine, which resulted in rising commodity and energy prices.
Inflation continues to “significantly exceed” the FOMC’s “longer-run goal.” The developments in Ukraine will “add to near-term inflation pressures.”
Both Russia and Ukraine are major suppliers of commodities that are “used in the production of energy, food, and some industrial inputs.” As supplies from these nations remain cut off from the global market, it will push up prices of the commodities and cause price hikes in downstream industries over time, the participants said. In addition, the war has also disrupted supply chains.
Some participants argued that a more “protracted conflict than the public currently expects” could create tighter financial conditions. The rising uncertainty can force consumers and businesses to cut back on spending.
A few argued that the United States had a “relatively low level of financial and trade exposure” with Russia, due to which the country is “well-positioned” to absorb any more demand shocks.
“Many participants noted that—with inflation well above the committee’s objective, inflationary risks to the upside, and the federal funds rate well below participants’ estimates of its longer-run level—they would have preferred a 50 basis point increase in the target range for the federal funds rate at this meeting,” the report said.
However, due to the uncertainty surrounding Russia’s invasion of Ukraine, a 25 basis points increase was finalized. Several participants pointed out that 50 basis point increases could be appropriate in the future, specifically if inflationary pressures were to intensify or remain elevated.
Since the Russia-Ukraine war poses “heightened risks” for the United States, all officials judged risk management as critical while deciding on monetary policy.
The inflation rate in the United States is at its highest level in 40 years. Former Federal Reserve Governor Lawrence Lindsey recently warned that there could be “one to 1.5 monthly inflation prints” very soon.
This could bring down consumer purchasing power by around “2 points on top of the 2.5 points it has already declined since the beginning of 2021,” he said. “You can’t have a consumer absorb that much of a shock quickly without having a recession.”