The US Federal Reserve (the Fed) is expected to raise its policy rate by 0.25 percent at the upcoming FOMC meeting, as previously signaled, amid high and accelerated inflationary pressures. While the increase in policy rate may not resolve supply issues – the primary cause of the current inflation, it should decrease inflation forecasts and somewhat help avoid an inflation spiral. Meanwhile, the US labor market remains strong and is approaching full employment. Given the uncertainty surrounding the conflict between Russia and Ukraine, the Fed will likely avoid implementing an overly hawkish monetary policy. Thus, the policy rate is expected to be raised by a mere 0.25 percent, bringing it to a level of 0.25-0.50 percent at the forthcoming FOMC meeting, as the Fed had signaled earlier.
However, the Fed will need to keep track of and assess the economic ramifications of the Russia-Ukraine conflict, to decide on a monetary policy suited to the upcoming period. The Fed will likely face circumstances that require a balance between inflationary risks and economic risks. Amid mounting risk factors, the Fed may raise its inflation forecast and reduce its economic projections during this FOMC meeting. At the same time, the market at large should monitor the Fed’s ‘dot plot’, as many believe that the Fed will raise interest rates at least five times this year. The policy rate by the end of 2022 is currently expected to be around 1.75-2.00 percent. Nonetheless, KResearch views that the timing of policy rate increases will depend on the course of the Russo-Ukrainian crisis, as well as its impacts on the US economy – all of which could shift present viewpoints regarding potential policy rate increases. If the economic sanctions on Russia prove to be protracted and damaging to the extent that they severely affect the US economy and the global economy as a whole, the Fed may be compelled to increase interest rates slower than the market presently anticipates.