The Fed’s narrative about moving cautiously once they get rates up to around 2.5% also reflects their high uncertainty.
Russia’s invasion of Ukraine and China’s round of virus lockdowns could both slow global growth and further snarl supply chains, creating more scarcity and higher prices. At the same time, slowing growth in China and Europe could create disinflationary forces.
Anna Wong, the chief U.S. economist for Bloomberg Economics, said just a 4% decline in the level of GDP in China can lead to a 30% reduction in oil and commodity prices, potentially off-setting the inflationary effects of Europe’s potential oil embargo on Russia.
An easing of raw materials prices may “seduce” the committee to pause as they approach a 2.5% policy rate later this year, Wong said.
But wage pressures are likely to continue to grow, at least in nominal terms, she said, and sustain core service price increases.
“The path to a soft landing is very narrow,” Wong said, and depends on faster labor force growth to help satisfy demand for workers, which may be unlikely. “The Fed will have to keep hiking and cannot afford to stop until they are closer to 4%.”
This article was provided by Bloomberg News.