The Russian invasion of Ukraine has caused uncertainty around the Fed’s interest rate decision, much to the consternation of investors.
The Fed has alluded to a 0.25% increase of the Federal Funds Rate, the interest rate that banks lend their overnight deposits to one another,1 at its March meeting. Until recently, there was speculation that the Fed officials needed a 0.50% rate hike to help manage the mounting inflationary concerns.2
The Federal Reserve Board takes into consideration several macroeconomic factors prior to rendering a decision on whether or not to make a change to the Fed Funds Rate, and if so, to what degree.
Energy prices have been on the rise since Russia began to assemble forces at the Ukrainian border. As a rule of thumb, as prices rise, consumer discretionary spending trends lower as businesses take on higher costs. (Remember, consumer spending accounts for a large portion of our overall economy.)
Higher energy prices in conjunction with higher commodity prices and the prospect of slower economic growth due to lower consumer spending has placed the Fed in a quandary: raise interest rate in an attempt to quell raising inflation or wait and see. Raising interest rates too quickly can potentially adversely affect the economy, while doing nothing can continue to allow inflation or even cause hyperinflation.
Fed Chair Jerome Powell testified before Congress that he still sees interest rate hikes ahead but acknowledges that geopolitical events have interjected uncertainty into the Fed’s outlook.3