There are two main narratives on the impact of the Russian Ukrainian conflict on the Fed's policy. The first narrative is the economic growth narrative, which believes that geopolitical events will slow us growth, so that the Fed's policy may be marginally relaxed. The second narrative is the inflation narrative, which believes that the conflict between Russia and Ukraine will push up commodity prices, thus exacerbating the problem of inflation in the United States, and the Fed's policy will accelerate tightening. In this paper, we will analyze the rationality of the two kinds of narration in detail.
The conflict between Russia and Ukraine has little impact on US growth, and the pace of monetary tightening of the Federal Reserve will probably not slow down.
We believe that there are three reasons why the Fed's policy is not affected by the "economic growth narrative".
First, since 1990, the Fed has never reversed its policy orientation (from tightening to easing) due to geopolitical problems. We believe that the Fed has communicated to the market its intention to raise interest rates in March. This means that the Fed has actually entered the "tightening track". From historical experience, the probability of switching from tightening to easing is low.
Second, after the September 11 attacks and during the Sino US trade frictions, the Federal Reserve cut interest rates in response. The US military did not intervene this time, and the conflict did not occur in the United States. Moreover, Russia accounted for only 0.79% of us international trade and 14.33% of China. Overall, the conflict between Russia and Ukraine has little impact on US economic growth.
Third, high inflation in the United States will also not give the Fed monetary policy "breathing space". In order to prevent excessive inflation and raise people's medium and long-term inflation expectations, resulting in a "wage inflation spiral", the Fed's primary goal is to suppress inflation. The economic uncertainty brought by the Russian Ukrainian conflict does not constitute a disturbance of policy direction. Of course, the above analysis is only for the current situation.
If the stability of the global capital market is subject to greater impact in the future (such as the stability of the offshore dollar market), or the conflict between Russia and Ukraine escalates, in extreme cases, we do not rule out that the Fed will slow down the pace of tightening or even turn to easing.
The conflict between Russia and Ukraine triggered the rise of bulk prices, with limited impact on core inflation in the United States
Russia is the world's major energy exporter, and Ukraine is the major Shenzhen Agricultural Products Group Co.Ltd(000061) exporter. The conflict between Russia and Ukraine mainly affects crude oil and Shenzhen Agricultural Products Group Co.Ltd(000061) prices, and then affects us inflation. Under the conflict between Russia and Ukraine, the shortage of natural gas in Europe has intensified. However, due to transportation reasons, the impact of the conflict between Russia and Ukraine on the United States is more reflected in Shenzhen Agricultural Products Group Co.Ltd(000061) pricing.
It is estimated that the impact of energy and Shenzhen Agricultural Products Group Co.Ltd(000061) prices on US inflation (taking CPI as an example) is mainly reflected in overall inflation, with relatively little impact on core inflation. In the case of high commodity prices (WTI crude oil rose to US $110 / barrel and CRB food spot index rose to 630), the rise in commodity prices may increase US CPI by 0.58% year-on-year and core CPI by 0.07% year-on-year at most in 2022.
In addition, there is a time lag in the transmission of bulk commodities to inflation, and the inflation impact of the Russia Ukraine conflict is expected to be concentrated after the second quarter.
The conflict between Russia and Ukraine has triggered inflation concerns, and the Fed will not accelerate tightening for the time being.
The conflict between Russia and Ukraine triggered a rise in commodity prices, and the impact on US inflation is expected to be released after the second quarter. We assess that this impact is small, and it is expected that the pace of interest rate hike at the Fed's March meeting will not change.
Focus on the impact of commodity prices on US inflation after the second quarter, and then evaluate the Fed's monetary policy (second quarter). At the current time point, we maintain our judgment on the Fed's monetary policy. The Fed has a high probability of raising interest rates four times in 2022 and 25bps in March. If the US wage growth is high in February and widespread high inflation intensifies, the Federal Reserve may raise interest rates by 50bps at its meeting in March.
Risk tip: the liquidity of offshore US dollar market has tightened significantly; Geopolitical events exceed the expected development risk; The risk of runaway inflation in the United States; Deviation in the understanding of the Fed's monetary policy.
