As the central bank's policy makers prepare to end the “near-zero” interest rate policy, will the events in Ukraine have any impact?
One of the Fed’s roles is to set “U.S. monetary policy to promote maximum employment and stable prices in the U.S. economy.”
However, inflation is currently at multi-decade highs and consumer confidence declined for the second consecutive month in February.
The short-term economic outlook is impacting future purchases for consumers, and the current geopolitical situation has increased stock market volatility.
I spoke with Chester S. Spatt, Pamela R. and Kenneth B. Dunn Professor of Finance, Tepper School of Business at Carnegie Mellon University.
He served as chief economist and director of the U.S. Securities and Exchange Commission's Office of Economic Analysis from 2004 to 2007 and was a member of the Fed's Model Validation Council.
Professor Spatt doesn’t believe the Fed can pivot from its direction of rate hikes given the current rate of inflation, in spite of what is occurring in Ukraine and the financial markets.
"The Fed is very far behind the curve, and to pull back from the strongly choreographed rate hikes could create further market turmoil," he stated.
Prior to last week’s invasion, rate hawks were predicting a 50-basis point hike and as many as seven raises before the end of the year. However, the market’s present instability may prompt the Fed to enhance its flexibility in both the amount and timing of their monetary policy easing.
Professor Spatt added that “The underlying inflation that the economy faces is huge—and a significant portion is from the demand side. Hence, returning to a more normalized and less stimulative monetary policy is key.”
With inflation both persistent and non-transitory, the Fed has its work cut out to reduce the current rate from 7% annually to the desired 2%. |