Its official-Russia has launched a full-scale invasion of Ukraine. After stationing troops along the border for weeks, Russia has now given the order to move into Ukraine. The news sent markets into a tailspin. Stocks were down sharply earlier in the day, with the Dow Jones Industrial Average declining by over 700 points at the session lows. Gold shot higher, trading up near the $2000 level in the overnight session, running out of gas around the $1976 area. The yellow metal ajs since backed off sharply, however, as traders and investors reassess the Ukraine/Russian conflict. The metal has, in fact, dropped below the $1900 level in late afternoon trade as the Biden Administration issues new sanctions against Russia.
The new sanctions announced by Biden today will target more Russian banks as well as the country’s ability to do business in alternative currencies including yen, pounds, euro and more. President Biden suggested that the war is a “premeditated attack” and Russia will now bear the consequences of its actions. The President reiterated that the sanctions are designed to have a long-term impact on Russia while minimizing any effects felt by the U.S. and its allies. The Biden commentary sent markets moving. Gold declined and not only gave up all of its overnight and daily gains but went deeply into negative territory.
The Russian/Ukrainian war could have an effect on the Fed and its tightening plans. While the Fed is still expected to begin tightening next month, the pace of any further hikes could potentially be slowed due to the conflict. Not only are markets having to watch the effects of war, but there may also be the risk of an oil shock. Oil prices hit over $100 per barrel earlier in today’s session, and a rise in tensions over the conflict has the potential to disrupt supplies, possibly leading to sharply higher prices. Stronger crude would not be a good thing, either, as it may come at a time when inflationary pressures are already being felt by the public. Higher energy costs could cause the public to cut back on spending, and as spending declines, so does economic output.
Fed policy has already likely been very complicated due to the ongoing viral pandemic. Now, the Fed will also be forced to contend with war and the possibility of an oil or commodity spike. These issues may cause the central bank to rethink its plans, although they are unlikely to stop the Fed from taking interest rates higher. The issues may, rather, give the Fed reason to slow down their tightening or take a more modest approach to policy normalization.
Recent developments have lessened the likelihood of a half-point hike by the Fed next month. Fed Funds Futures now show a less than 10% probability of a half-point hike. The central bank will almost certainly hike by 25 basis points, as usual, and point to further hikes down the road.