The Federal Reserve has to raise its key short-term target interest rate in the week ahead. It would lose credibility if it didn’t.
The real question is how it will manage expectations for future rate hikes when it releases its decision and latest economic projections. Chairman Jay Powell holds a press conference Wednesday.
The Fed’s forecast has gotten a lot less clear in the past three weeks because of Russia’s war in Ukraine. The central bank will work hard to not add to the fog of Vladimir Putin’s war for investors. “We are going to avoid adding uncertainty to what is already an extraordinarily challenging and uncertain moment,” Powell told the House Financial Services Committee in early March.
Investors should not be lulled into thinking Putin has stopped the Fed’s ambition to fight inflation, though. Consumer prices jumped almost 8% in February compared to a year ago – a 40-year high. After months of delay, the Fed is convinced it must make borrowing more expensive in hopes of squeezing high inflation before it more severely threatens economic growth.
The war in Ukraine feeds inflation with higher energy and grain prices. It also raises the risk of a sharper economic slowdown than the Fed would like to engineer. And that is likely to temper the Fed’s appetite to push up rates quickly.
“We believe there is a good chance that this will be a slower and shallower rate-hike cycle than previously anticipated,” wrote Schwab Chief Fixed Income Strategist Kathy Jones in early March.
Powell will be poised to guide expectations after the agency’s decision in the week ahead. Already, the futures market has dropped the probabilities of a faster and steeper interest rate strategy. Make no mistake, though – rates will be rising. They must for the Fed to have any credibility in fighting inflation.
The violence Russia has unleashed in Ukraine continues to extract a barbarous cost. The Fed will tread lightly to avoid it costing investor confidence in the central bank’s own goals.
