Federal Reserve officials are turning a wary eye to Russia’s invasion of Ukraine, though several have signaled in recent days that geopolitical tensions are unlikely to keep them from pulling back their support for the U.S. economy at a time when the job market is booming and prices are climbing rapidly.
Stock indexes are swooning and the price of key commodities — including oil and gas — have risen sharply and could continue to rise as Russia, a major producer, responds to American and European sanctions.
That makes the invasion a complicated risk for the Fed: On one hand, its fallout is likely to further push up price inflation, which is already running at its fastest pace in 40 years. On the other, it could weigh on growth if stock prices continue to plummet and nervous consumers in Europe and the United States pull back from spending.
The magnitude of the potential economic hit is far from certain, and for now, central bank officials have signaled that they will remain on track to raise interest rates starting next month, a policy move that will make borrowing money more expensive and cool down the economy.
“I see the geopolitical situation, unless it would deteriorate substantially, as part of the larger uncertainty that we face in the United States and our U.S. economy,” Mary C. Daly, president of the Federal Reserve Bank of San Francisco, said Wednesday at an event hosted by the Los Angeles World Affairs Council. “We’ll have to navigate that as we go forward.”
Ms. Daly said that she did not “see anything right now” that would disrupt the Fed’s plan to lift interest rates.
Raphael Bostic, the president of the Federal Reserve Bank of Atlanta, said during an event on Tuesday that the situation in Ukraine represented a “downward risk” to growth, but suggested he still supported withdrawing some of the Fed’s help from the economy.
But some analysts are warning that the fallout of the conflict could be meaningful,
“Normally geopolitical crises ultimately turn out to be a fade for financial markets and a buying opportunity for investors willing to look past the headlines,” Krishna Guha at Evercore ISI wrote in a research note Thursday morning. “We are very wary of taking that line today.”
Mr. Guha noted that the invasion could disrupt the post-Cold War world order and warned that the jump in energy prices and fallout from sanctions “will complicate the ability of central banks on both sides of the Atlantic to engineer a soft landing from the pandemic inflation surge.”
Economists have been warning that a “soft landing” — in which central banks guide the economy onto a sustainable path without causing a recession — might be difficult to achieve at a time when prices have taken off and monetary policies across much of Europe and North America may need to readjust substantially.