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Russia’s Ukraine invasion may rule out 50-bps rate hike by US Fed in March

US retail inflation is at its highest levels since the early 1980s due to a booming economy and job market

Mumbai / February 24, 2022 / 11:15 AM IST

The risk aversion in global markets and tightening of financial conditions caused by Russia’s military action in Ukraine has forced traders to cut back on their apprehension of a 50-basis point hike in interest rate by the US Federal Reserve.

Besides the ongoing Russia-Ukraine crisis, the possibility of aggressive rate hikes from the US Fed has been driving a sharp sell-off in global equities over the past few months. In India, foreign portfolio investors have been net sellers for the past five months anticipating higher global interest rates.

CME’s FedWatch tool showed that traders now see only a 9.5 percent chance of the US central bank hiking rates by 50 basis points as against 45 percent probability only a week ago. Similarly, traders are now nearly certain that the Fed will only raise interest rates by 25 basis points.

The probability of a 25-basis point rate hike from the US Fed spiked to 90.5 percent on February 24 from 54.7 percent a week ago, reflecting a shift in traders' perception of what the Fed might do, given the geopolitical uncertainty.

“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 US economy and we’ll have to navigate that as we go forward,” Federal Reserve Bank of San Francisco President Mary Daly said on February 23.

That said, Daly went on to add that she does not see anything that would disrupt the Fed from raising interest rates.

Earlier this year, global markets had come under selling pressure after inflation data in the US and US Federal Reserve’s monetary policy meeting suggested that the US central bank will step the gas on fighting inflation.

US retail inflation is at its highest levels since the early 1980s due to a booming economy and job market and supply disruptions caused by the COVID-19 pandemic.

“In assessing the appropriate stance of monetary policy, the committee will continue to monitor the implications of incoming information for the economic outlook. The committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the committee's goals,” an FOMC statement had said in January .

Global investment banks such as Goldman Sachs had warned that the US Fed could raise rates five times in 2022, while Nomura had warned of a 50 basis points hike in the upcoming March meeting after US Fed Chairman Jerome Powell’s hawkish press conference following the FOMC meeting.

The US Federal Reserve and other central banks are likely to face a difficult situation to navigate as rising geopolitical tensions threaten global growth outlook while surging energy prices further fan inflation.

In India, the Reserve Bank of India’s forecasts of benign inflation in the second half of the next financial year will come under doubt after Brent crude oil breached the $100-mark for the first time in seven years.

“Our sense is that the headline inflation has peaked in January, and from here on, it will ease down to the target of 4 percent by the last quarter of 2023,” RBI Deputy Governor Michael Patra said at the Asia Economic Dialogue 2022 on February 23.
Chiranjivi Chakraborty