The war in Ukraine and associated international geopolitical crisis continues to evolve rapidly. Just this afternoon IEA members agreed to release 60 million barrels of oil from strategic reserves to mitigate spiking energy prices, and Treasury Secretary Yellen released a statement following a meeting of G7 financial leaders. The Financial Stability Oversight Council, which includes both Yellen and Powell, met Monday to discuss international market developments specifically because of the Ukraine situation and noted that the financial system “continues to function in an orderly manner.” It’s possible that President Biden’s State of the Union address this evening will bring further news. We have long said that a severe escalation of this long-building crisis represented one of the most significant risks to Fed policy.
That said, our base case remains seven 25-basis-point funds rate hikes this year, as we reaffirmed last week. As we considered Ukraine scenarios in recent weeks, we had thought that a full-scale invasion would likely have jolted markets, and the Fed policy outlook, more than it has to this point. Most recently, however, market pricing does appear to suggest perhaps some greater—though still very small—prospect of developments pushing the Fed to delay liftoff until after March.
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