Russia invaded Ukraine: could it change Fed’s response to inflation?

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The global financial markets are riling up on Thursday after Russia launched a full-scale invasion of Ukraine that sent Brent Crude above $100 a barrel for the first time since 2014.

U.S. Fed will have to adjust

The development, as per economist Mohamed El-Erian, will push the U.S. Federal Reserve into adjusting its response against inflation. For one, the central bank is unlikely to be as aggressive anymore, he said on CNBC’s “Squawk Box”.

This takes 50 basis points completely off the table. It takes the eight or nine rate hikes in 2022 off the table. It means the Fed will have to be even more careful, it’ll have to tolerate higher inflation. Unfortunately, we’ll have a very unsatisfactory situation in terms of inflation and growth.

Moscow Exchange or “Moskvabörsen” suspended trading this morning as Russian stocks crashed after Putin ordered a “special military operation” in Ukraine. Trading resumed later with the Moex Russia index down 30% at present.

Is recession still on the table?

The U.S. CPI was up 7.5% YoY in January – the hottest reading since 1982. Historically, the central bank pushes economy into a recession when inflation gets this high. But there are things to consider this time, said El-Erian.

The question right now is would they put the economy into a recession in the midst of a geopolitical shock. When you look at the probability, it’s pretty even between whether they slam on the breaks or alternatively, they tolerate higher inflation and push the problem down the rope.

According to the president of Queens College, the U.S. Fed is late in responding to inflation. Consequently, it’s now restricted in terms of policy options. SPX opened close to 2.0% down on Thursday but has recovered most of its intraday losses as of writing.

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