Fed: impact of Russian invasion on US economy is uncertain, but could affect spending and investment

Russia’s invasion of Ukraine could affect the US economy through a variety of channels, from rising prices to declining spending and investment, the president of the Federal Reserve (Fed), Jerome Powell, although it is not clear what the final impact will be.

“What we know so far is that commodity prices have risen significantly, energy prices in particular. That is going to affect our economy” in the form of higher inflation, at least in the short term, he declared before the Senate Banking Committee.

“Also, we could see risk sentiment decline, so lower investment could be seen. We could see people holding back on spending. It’s hard to see what the effect will be on supply and demand,” he added.

Powell repeated his prepared remarks on Wednesday before a House panel whose members also focused on the Russian invasion of Ukraine. The conflict has triggered extensive financial and other sanctions against Moscow.

He said the Fed was watching the situation closely and had started running simulations, for example, about what persistent increases in oil prices might have on the economy.

Under the rules of thumb Powell provided, oil’s jump from around $75 a barrel in late December to around $110 on Thursday, if it lasts, could add nearly 0.9 percentage point to headline inflation and cut almost half percentage point of economic growth, a poor performance at a time when the central bank is trying to slow inflation without hurting jobs.

However, he indicated that so far the war has not changed the central bank’s plans to raise interest rates from its March meeting to try to reduce the pace of price increases, which are currently triple the annual target of 2 % Fed.

“It is appropriate that we continue along the lines that we had in mind before the invasion of Ukraine happened,” he said. The Fed chairman reiterated his comments on Wednesday that he would back an initial quarter percentage point hike in the benchmark rate at the March 15-16 meeting.

Although, if inflation does not subside, he said, “then we are prepared to go up by more than that amount in one or several meetings.”

However, lawmakers focused on the new situation now facing the Fed, and the possibility that the central bank faces a more difficult scenario in which inflation is fueled by war at a time when growth slows.

“I am a little concerned that this war has changed the risk profile,” said Sen. Pat Toomey, R-Pennsylvania.

“Both on the supply side and on the demand side there is a lot of uncertainty,” Powell said. However, he added that the “strong financial condition” of households and businesses can help sustain spending.