US Fed cautious on rate path amid Ukraine crisis

Federal Reserve officials next week will raise interest rates for the first time since 2018 and signal a faster pace of hikes in 2022, according to economists surveyed by Bloomberg, though they may be cautious amid uncertainty due to Russia's invasion of Ukraine.

While markets see as many as six or seven hikes this year spread out during the Federal Open Market Committee's remaining seven meetings, economists say the Fed's quarterly forecasts in the "dot plot" will show around four hikes for 2022 and they predict the Fed will follow through with five increases with no half-point moves.

Investors have ramped up expectations for an aggressive Fed posture in the face of the highest inflation in four decades. But the economists say the outlook has become muted by uncertainty over Ukraine, sanctions and surging commodities prices. The economists predict the Fed may raise rates by 1.25% this year, with rates reaching 2.5% in 2024.


"There is much higher uncertainty than normal about the course of Fed policy amid many crosscurrents," Roberto Perli, head of global policy research at Piper Sandler & Co, said in a survey response. "On net, the Fed is likely to be somewhat more cautious and dovish as a result than it would have been otherwise."

Chair Jerome Powell told lawmakers last week he would recommend a quarter-point rate hike at the March 15-16 Federal Open Market Committee meeting. Yet he's been vague about the pace of future increases and whether the policy group will consider larger half-point hikes. The survey of 42 economists was conducted March 7-10.

Powell said the Fed would do what was necessary to cool price pressures, while cautioning that Russia's invasion of Ukraine was a source of great uncertainty that had driven up oil prices. That would push inflation even higher, but also potentially hurt growth.

The turn to a more aggressive policy stance has been driven by surging inflation and a robust labor market, which Fed officials consider to be at or near full employment. The FOMC is likely to raise its inflation forecasts for 2022 to 3.9% from 2.6% in December, and trim its growth for this year to 3.3% while continuing to see unemployment rate staying around 3.5% for the next several years, according to the survey.

"The Federal Reserve is walking a tightrope, balancing the risks of a more entrenched and persistent inflation against a triggering a larger meltdown in credit markets," said Diane Swonk, chief economist at Grant Thornton.