Conflict in Ukraine appears unlikely to shake Federal Reserve officials from their plans to pull back support for the economy at this point, but the rapid escalation in tension is sure to draw policymaker attention and could make for even higher inflation in the near term.
The central bank has two jobs — fostering full employment and stable prices — and it has been preparing to raise interest rates and make other policy adjustments too cool down the economy as inflation runs at its fastest pace in 40 years.
Oil and gas prices have already risen during the conflict and could continue to climb, leading to a higher peak in headline inflation, which includes prices at the pump. The Fed typically avoids reacting to fluctuations in energy prices when setting its policy, given the volatility of fuel costs, but the potential disruption could make ongoing inflation trends all the more painful for consumers.
“The Federal Reserve pays very close attention to geopolitical events, and this one of course in particular as it’s the most prominent at this point,” Michelle Bowman, a Fed governor, said on Monday.
Ms. Bowman noted that the U.S. has minor banking, financial, and trade interests with Russia, and that “we don’t believe that would have a significant impact” on the economy given the small size of those relationships.
“But we do recognize that there are significant opportunities for potential impacts on the energy markets, as we’re moving forward, if things were to deteriorate,” Ms. Bowman added. “Obviously we’ll continue to watch that, and if we believe that might have some influence on the global economy, we’ll take that into account as we’re going into our meetings and discussing the economy more broadly.”
High fuel prices could weigh on consumer spending on other goods and services as families devote more of their monthly budgets to energy. If the potential for war makes consumers uncertain about the future or sends stock prices plummeting, it also could weigh on demand as nervous shoppers retrench.
Central bankers noted in minutes of their most recent meeting that geopolitical risks “could cause increases in global energy prices or exacerbate global supply shortages,” but also that they were a risk to the outlook for growth.
But officials have painted it as more of one risk among many than as a pivotal point of concern.
“We actually have seen fighting in this area of the world in the past,” James Bullard, the president of the Federal Reserve Bank of St. Louis, said on CNBC last week. “I do think it’s quite an important foreign policy issue, but I’m not seeing it as a leading macroeconomic issue, at least at this point.”
Assessing exactly what the conflict between Russia and Ukraine will mean for the American economy is challenging because it is unclear how much tensions will escalate and because it is not obvious how Russia might respond as the U.S. and Europe prepare sanctions.
Plus, while rising fuel prices could push up inflation, global unease is likely to push the value of the dollar higher as global investors move into what they see as “safe-haven” assets. That could make imported goods cheaper, working in the opposite direction to rising fuel costs.