Despite the increase in commodity prices, which causes inflation, the Fed’s tightening of financial conditions may be limited. Unless there is a serious slump effect on the economy, the Fed will raise interest rates. However, the probability of a 50 basis point increase in March has been zeroed. The increase expectation for the whole year decreased to 4. The Fed will also hesitate to shrink its balance sheet as a result of the events.
An increase in oil prices means a decrease in disposable income. And similarly for all commodities the boost effect will stratify inflation. The country with the highest producer position in all these commodities is Russia. Rising military tensions are causing volatility in energy markets. The natural consequence of this will be price increases and an increase in inflationary pressures. The negative effects of the increasing tension between Ukraine and Russia on the energy markets may trigger a stagflation on a global scale.
Pricing Fed futures funds… Source: Bloomberg, CME Fedwatch
In light of these reasons, it is a more rational expectation for the Fed to act more moderately by considering data dependency and current risks. In the blackout period before March 16, it seems possible that the interest rate hike process and even the balance sheet reduction process will be based on a more moderate path in Powell’s statements. In order not to risk a phenomenon such as employment and a hard landing, the Fed will need to revise its current communication language and expectations a little, and it will be expected to leave a margin for tightening in order not to leave the inflation phenomenon to chance. To be sure at this stage; The pricing of the Fed’s 50 basis points increase in interest rates in March was withdrawn…
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