If there were any lingering doubts about how aggressive the Federal Reserve might be at its upcoming meeting in a few weeks, Vladimir Putin probably just erased them.
The Fed has a policy session on March 16 and is expected to raise interest rates for the first time since 2018 after cutting them to zero at the start of the pandemic in March 2020.
Because of inflation concerns, many economists and investors were predicting that the Fed could go big and raise rates by a half-percentage point (50 basis points) to try and fight rising consumer prices. But Russia's invasion of Ukraine has likely changed that calculus...even though oil prices have shot up even more.
According to the closely-watched federal funds futures on the CME, traders are now pricing in just a 13% chance of a 50 basis point rate increase and an 87% likelihood of a more modest quarter-point hike. Earlier this month, investors were pricing in nearly 100% odds that the Fed would boost rates by a half-point.
Even though higher oil prices are a symptom of inflation, they also could lead to a pullback in consumer spending. With that in mind, the Fed may need to err on the side of caution and not raise rates too sharply.
"The threat of a supply shock in oil places further burdens on discretionary consumption, possibly weighing on growth and complicating the Federal Reserve’s plans to combat inflation by raising interest rates. A 50-basis point move at the March meeting now seems unlikely," said John Lynch, chief investment officer for Comerica Wealth Management.